S&P Affirms Wisconsin Energy (WEC), Integrys (TEG) Ratings Following M&A Announcement

Standard & Poor's Ratings Services said it affirmed its ratings on Wisconsin Energy (NYSE: WEC) ("WEC") and WEPCO, including their 'A-' issuer credit ratings. We also affirmed the ratings on WG, including its 'A' issuer credit rating. We also affirmed the 'A-2' short-term/commercial paper ratings on WEC and WEPCO and the 'A-1' short-term/commercial paper rating on WG.

At the same time, we affirmed our ratings on Integrys (NYSE: TEG), WPS, PGL&C, and NSG, including their 'A-' issuer credit ratings. We also affirmed the 'A-2' short-term/commercial paper ratings on Integrys, WPS, and PGL&C.

Standard & Poor's revised its credit outlook on WEC to negative from stable. We also revised our credit outlook on Integrys, PGL&C, and NSG to negative from stable. The outlooks on WEC's subsidiaries WEPCO and WG and Integrys' subsidiary WPS remain stable because the transaction does not affect their stand-alone credit profiles and because of sufficient regulatory insulation.

The negative outlook on WEC, Integrys, PGL&C, and NSG reflects the potential negative effect on WEC's consolidated financial measures of the company's announced $9.1 billion acquisition of Integrys. We expect that the incremental debt associated with this transaction will weaken WEC's financial measures. Therefore, we believe that the company's consolidated financial risk profile could fall toward the lower end of our "significant" financial risk profile category, leaving little room for underperformance relative to our forecast. A one-notch downgrade would be warranted if the adjusted funds from operations (FFO)/total debt ratio failed to improve in line with our expectations, and remained below 15% on a sustained basis.

On June 23, 2014, WEC entered into an agreement to acquire Integrys for $9.1 billion, which includes the assumption of about $3.3 billion of Integrys' debt. From a qualitative standpoint, the acquisition will strengthen WEC's position within the "excellent" business risk profile category because it enhances scale, scope, operational, geographical, and regulatory diversity. We view the addition of more gas distribution and transmission operations favorably because we regard those businesses as having somewhat lower risk than the vertically integrated electric operations.

"Because we consider the unregulated businesses as having significantly higher business risk than the regulated utility operations due to competitive pressures and greater variability in cash flow generation, the company's commitment to sell or wind down Integrys' energy supply business and limit growth in the solar business so that 99% of the company's EBITDA is regulated also supports the "excellent" business risk profile," said Standard & Poor's credit analyst Barbara Eiseman.

The negative outlook on WEC, Integrys, PGL&C and NSG reflects consolidated financial measures that are toward the lower end of our "significant" financial risk profile category, leaving little room for underperformance relative to our forecast. A one-notch downgrade would be warranted if the adjusted FFO/total debt ratio failed to improve in line with our expectations, and remained below 15% on a sustained basis.

We could revise the outlook to stable if financial measures were to improve following the acquisition so that measures were restored to the middle range of the "significant" financial risk profile category.

Ratings stability for WEPCO, WG, and WPS reflects sufficient regulatory insulation and their stand-alone credit profiles, which would be unaffected by the transaction.

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