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RPT-Fitch upgrades Pinnacle West & Subsidiary Arizona Public Service to 'BBB+'
May 17, 2013 / 12:46 PM / in 5 years

RPT-Fitch upgrades Pinnacle West & Subsidiary Arizona Public Service to 'BBB+'

May 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has taken the following rating actions on Pinnacle West Capital Corp. (PNW) and its subsidiaries:

Pinnacle West Capital Corp. :

--Long-term Issuer Default Rating (IDR) upgraded to ‘BBB+’ from ‘BBB’;

--Short-term IDR upgraded to ‘F2’ from ‘F3’;

--Commercial paper upgraded to ‘F2’ from ‘F3’.

Arizona Public Service Co. (APS):

--Long-term IDR upgraded to ‘BBB+’ from ‘BBB’;

--Short-term IDR upgraded to ‘F2’ from ‘F3’;

--Senior unsecured upgraded to ‘A-’ from ‘BBB+';

--Commercial paper upgraded to ‘F2’ from ‘F3’.

PVNGS II Funding Corp.

--Secured lease obligation bonds upgraded to ‘A-’ from ‘BBB+'.

The Rating Outlook is Stable.

Approximately $3.4 billion of long term debt is affected by the rating action. The upgrade reflects strong operating performance in 2012 and the constructive outcome of APS’ settled 2010 General Rate Case (GRC), which will provide a tailwind for improved earnings and credit ratios this year. The ratings also consider APS’ solid liquidity position, manageable debt maturities, low leverage, and the financial support from its corporate parent, PNW, including anticipated equity infusions agreed to in APS’ settlement of its 2008 GRC.

Stable Outlook: The Stable Outlook reflects the relatively predictable earnings and cashflows of PNW’s core regulated operating subsidiary, APS, a vertically integrated electric utility subsidiary. Substantially all of PNW’s consolidated long-term debt resides at APS, except for a $125 million term loan which matures in 2015.

KEY RATING DRIVERS

--Constructive settlement of 2010 GRC;

--Four-year GRC stay-out through May of 2015;

--Low leverage;

--Large Capex program including environmental upgrades at coal plants.

Strong Coverage Measures

Strong Operating Performance: APS’ EBITDA to interest coverage improved to 6.4x for the LTM period ending March 31, 2013 as compared with 6.0x for 2012, and primarily reflects new rates effective July 1, 2012 as per APS’ recently settled 2010 GRC. The improved earnings also reflect cooler than normal winter weather in APS’ service territory, improved customer growth, and new transmission rates.

Leverage, as measured by debt to EBITDA, was low at 2.5x. Credit metrics compare well to ‘BBB+’ guideline ratios and peers. Going forward, Fitch expects EBITDA and FFO coverage Metrics to approximate 5.0x-6.0x, and for FFO/Debt leverage metrics to remain above 22% through 2015.

GENERAL RATE CASE SETTLEMENT

Constructive 2010 GRC Settlement: The Arizona Corporation Commission (ACC) approved the regulatory settlement agreement as proposed by APS and other parties in APS’s 2010 GRC without material modifications on May 15, 2012. The ACC approved an increase in nonfuel base rates of $116.3 million, which represented roughly 60% of APS’s requested amount based on an authorized return on equity (ROE) of 10% for new rates effective July 1, 2012. Additionally, per the terms of the settlement, APS agreed to a four-year stay-out and is prohibited from filing its next rate case before May 31, 2015, for rates effective on or after July 1, 2016, at the earliest. Controlling operating costs will be key to maintaining credit quality.

Good Liquidity: As of March 31, 2013, PNW had total consolidated liquidity available of $1.2 billion including $25 million of cash and cash equivalents. PNW maintains liquidity through a $200 million unsecured credit facility which matures in November 2016. APS maintains liquidity through two $500 million unsecured credit facilities which mature in November 2016 and April 2018, respectively. Additionally, PNW and APS can upsize their $200 million and $500 million credit facilities to $300 million and $700 million with consent of the lenders. Fitch notes that there were no borrowings against these facilities as of March 31, 2013. The credit facilities are subject to a maximum debt to capitalization covenant of 65% and as of March 31, 2013 both PNW and APS were in compliance with debt to capitalization ratios of 45.2% and 43.7%. PNW’s revolving credit facility contains cross-default provisions to APS, while APS’ revolving credit facilities do not contain cross-defaults to PNW. As of March 31st 2013, PNW and APS were in compliance with all financial covenants under these facilities.

Manageable Maturities: In the intermediate term, PNW’s long-term debt maturities are sizable, with $1.5 billion scheduled to mature through 2016 as follows (includes capital lease obligations): $123 million in 2013, $540 million in 2014, $470 million in 2015, and $358 million in 2016. Fitch expects PNW to refinance these maturities upon expiry.

Strong Nuclear Performance: On the operating front, APS’s generating facilities exhibited solid operating performance in 2012 with meaningful improvement achieved at the Palo Verde Nuclear Generating Station (PVNGS). In 2012, the PVNGS successfully refueled units 2 and 3, and recorded its best generation year ever producing over 31.9 million megawatt-hours (Mwh), with an overall capacity factor of 92.3%, significantly improved from 79% in 2007. Fitch notes that PVNGS set a new generation record for a power plant of any fuel type and is the only U.S. generating facility to ever produce more than 30 million Mwh.

CAPITAL EXPENDITURES

Large Capital Spending Program a Key Growth Driver: Capex at APS is projected to average $1.2 billion per annum through 2015 and includes investments associated with the purchase of Southern California Edison Company’s interest in units 4 and 5 at the Four Corners coal-generating facility for $253 million by 2013 and related emissions control upgrades. Other investments include the construction of new transmission capacity, increased efficiency programs, installation of advanced meters, and increased renewable generation, specifically under the AZ Sun program. APS is increasing its renewable generation capacity to meet renewable portfolio standard targets in the state. For the LTM period ending March 31, 2013, Fitch notes that both APS and PNW generated positive FCF. Going forward, Fitch expects APS to fund the majority of estimated capex internally and the balance with external financing, which will moderately pressure leverage metrics. Going forward, leverage, as measured by debt to EBITDA is expected to moderately increase to 3.0x by 2015. Fitch anticipates external funding requirements to be financed via a balanced mix of equity and debt.

COMPANY PROFILE

PNW is a parent holding company that derives substantially all of its revenue from its wholly-owned operating subsidiary, APS. APS is a vertically integrated regulated electric utility that accounted for virtually all consolidated revenues, earnings, cashflows and assets. For 2012, 2011, 2010, and 2009, APS approximated 100%, 100%, 97%, and 99%, of PNW’s consolidated revenues, respectively. APS is the largest electric utility in Arizona, serving 1.1 million customers in a 34,646 square mile service territory.

Rating Sensitivities

No positive rating actions are expected at this time.

What could cause future Negative Rating Action?

Greater-than-anticipated increases in operating and other expense could erode credit quality. An unexpected, prolonged base load generating facility outage could lead to adverse credit rating actions.

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