Fitch Affirms Westar at 'BBB'; Outlook Positive

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) of Westar Energy, Inc. (WR) and its utility operating subsidiary Kansas Gas and Electric Company (KG&E) at 'BBB'. Fitch has also affirmed WR and KG&E's securities ratings. Fitch maintains the Positive Rating Outlook for both entities. A full list of rating actions follows at the end of this release.

The rating affirmation and Positive Outlook is supported by WR's pursuit of a utility-centric low-risk strategy, a balanced regulatory environment, and an anticipated strengthening of the credit metrics. Fitch expects WR's credit metrics to improve during the forecast period (2015-2017) based upon higher rates effective late 2015 following adjudication of the general rate case (GRC), declining capex, and the recent settlement of equity forwards. Fitch expects to resolve the Positive Outlook after the resolution of the GRC petition, expected by late October.

WR filed a GRC with the Kansas Corporation Commission (KCC) in March 2015, requesting to raise rates by $152 million annually. While a substantial increase (approximately 8% increase in retail rates), the majority of the request pertains to pre-approved capex spend, which mitigates some of the risks associated with the large request. Declining demand from large industrial users, slowness in approval of future transmission projects and challenge to the earned return on equity (ROE) on FERC assets create some headwind to revenue and earnings growth over the near term. While topical, Fitch does not expect these factors to materially influence WR's credit metrics over the coming years.

KEY RATING DRIVERS

Low Risk Profile: The ratings reflect WR and KG&E's relatively predictable earnings and cash flows, competitive retail rates, management's conservative strategy focused on integrated utility operations in Kansas, a service territory not prone to boom-bust cycles, and a generation fleet generally compliant with expected environmental regulations.

Constructive Regulatory Compact: WR and KG&E benefit from a balanced regulatory compact in Kansas, including statutory time limits for the adjudication of GRC, single-issue rate cases and automatic cost-recovery mechanisms. The timeliness and perceived predictability of the Kansas regulatory compact is a key factor supporting WR's and KG&E's ratings.

General Rate Case: WR filed a GRC with the KCC in March 2015, requesting to raise rates by $152 million (7.9%) annually. The request is based on $600 million of incremental rate base assets, including $315 million for environmental upgrades at La Cygne and $270 million to extend the life of Wolf Creek, a 12-month test year ended September 2014, 10% ROE and 53.45% equity ratio. Most of this capex was pre-approved by the KCC, which mitigates some of the risks associated with a meaningful rate increase request. Fitch's financial forecasts reflect the assumption that WR is able to earn close to mid-9% ROE levels over the forecast period. WR has also requested an annually adjustable ROE mechanism as well as changes in rate design to better match fixed charges to fixed revenues and avoid subsidization of distributed generation customers. If approved, these changes will be construed positively by Fitch.

Declining Capex Plans: After significant investments in environmental upgrades, WR's capex program is expected to moderate to about $675 million annually in 2015-2017, from about $815 million annually in 2012-2014. Transmission investments will grow in importance to about one-third of spending, while distribution and generation should each account for about one-quarter of the spending. Environmental upgrade spending is expected to be modest over the forecast period.

Improving Credit Metrics: The ratings and Positive Outlook are supported by an anticipated strengthening of the credit metrics driven by lower capex, the recent settlement of $250 million in equity forwards, and higher rates effective from November 2015. We expect EBITDAR leverage to improve to 3.5x and EBITDAR interest-coverage to exceed 5x in 2016, compared with 4x and 4.5x respectively at year-end 2014.

Parent/Subsidiary Rating Linkage: KG&E is a wholly-owned operating utility of WR and its ratings are the same, reflecting highly centralized operations with shared employees, treasury and corporate functions, and a consolidated capital structure for rate-making purposes. Business is also conducted under the Westar names in contiguous geographies and WR's revolving credit facilities are collateralized by KG&E's first mortgage bonds, which include cross default provisions.

FINANCIAL FLEXIBILITY

Ample Liquidity with Modest Maturities: WR has $1 billion of revolving credit available through two bank facilities, with the majority maturing in September 2018. The bank facilities support a commercial paper program of up to $1 billion, with combined borrowings not exceeding $1 billion at any given time. The facilities may be extended by one-year and modestly upsized, subject to lender participation. All borrowings under these facilities are secured by KG&E first mortgage bonds. WR had $478 million of commercial paper outstanding and no borrowings under either credit facilities at April 30, 2015. WR typically maintains minimal cash and cash equivalents. WR's debt maturity schedule is modest and debt issuance is expected to be limited to opportunistic refinancing over the rating horizon.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Satisfactory outcome to the GRC petition that allows WR to realize mid-9% ROE over the forecast period, with new rates effective November 2015.

--Compound annual kwh sales growth of 1%.

--Capex program of about $675 million annually in 2015-2017.

--No incremental debt or equity issuance.

RATING SENSITIVITIES

Future developments, individually or collectively, that could lead to a positive rating action include:

--The final KCC order in WR's March 2015 GRC will be the key determinant of WR's future creditworthiness. A constructive GRC outcome in line with Fitch's expectations could lead to a one-notch rating upgrade;

--Sustained debt-to-EBITDAR leverage metrics below 3.6x.

Future developments, individually or collectively, that could lead to a negative rating action include:

--A downgrade is unlikely given the current Positive Rating Outlook. However, an adverse shift in the regulatory compact, including a restrictive outcome to the pending case filing, could lead to Fitch stabilizing the rating at the current 'BBB' level;

--A change in management strategy that becomes heavily biased toward shareholder returns, meaningfully higher capex that induces material regulatory lag, or prolonged unexpected plant outage at a major base load generation plant.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Positive Outlook:

Westar

--Long-term IDR at 'BBB';

--Senior secured debt at 'A-';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

KGE

--Long-term IDR at 'BBB';

--Senior secured debt at 'A-';

--Pollution control revenue bonds at 'A-';

--Short-term IDR at 'F2'.

Date of Relevant Rating Committee: May 29, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985610

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150529006056/en/

Fitch Ratings
Primary Analyst
Maude Tremblay, CFA
Director
+1-312-368-3203
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
or
Committee Chairperson
Peter Molica
Senior Director
+1-212-908-0288
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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