Fitch Rates Westar's $550MM FMBs 'A'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to Westar Energy, Inc.'s (WR) new $550 million issue of first mortgage bonds (FMBs). Proceeds will be used to redeem $300 million of 8.625% FMBs due 2018, repay short-term debt and for general corporate purposes.

KEY RATING DRIVERS

General Rate Case (GRC): The Kansas Corporation Commission (KCC) adopted a settlement in September 2015 authorizing a net rate base increase of $78 million for WR and Kansas Gas & Electric Co. (KG&E). The new rates will take effect Oct. 28, 2015. Fitch views the outcome to the GRC as balanced. While not specified in the approved settlement, Fitch estimates the rate increase represents about a mid-9% allowed ROE, which is slightly below the industry average. Credit-positive features of the settlement include the approval of a security tracker, new distributed generation residential tariffs, and fixed residential service fee increase to $14.50 from $12. WR is also permitted to file an abbreviated rate case no later than October 2016 for capital costs that include up to $50 million of grid resiliency improvements, the remainder of the environmental capex at its La Cygne Energy center, projects at Wolf Creek Generating Station, and 2015 environmental projects that would have been recovered through the environmental cost recovery (ECR) rider. Fitch notes the loss of ECR rider in the GRC settlement but expects the impact to be manageable given the lower expected environmental spend over the medium term and the ability to request an ECR rider for specific projects, if needed.

Low Business Risk Profile: The ratings reflect WR's and KG&E's relatively predictable earnings and cash flows, competitive retail rates, management's conservative strategy focused on integrated utility operations in Kansas, and a generation fleet generally compliant with current 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 GRCs, 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. WR has negotiated KCC-approved settlements for its GRCs filings in recent years, underscoring the utility's solid relationship with its key constituent groups.

Lower ROE on Transmission Assets: The KCC filed a challenge to WR's approved ROE on Federal Energy Regulatory Commission (FERC)-regulated transmission assets of 11.3% in August 2014. WR and KCC reached a settlement of 10.3% ROE (9.8% base plus 0.5% adder), which is currently pending FERC approval. The 100bp ROE reduction represents about an $11 million reduction in annual earnings, given a FERC-regulated rate base of approximately $1.1 billion.

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. Planned environmental upgrades are very modest at $40 million or less annually starting in 2016. Probable investments in wind farms to modernize and reduce the carbon footprint of the generation fleet have yet to be quantified thus are not included in our analysis.

Improving Credit Metrics: Under its base case scenario, Fitch anticipates WR's credit metrics will strengthen over the rating horizon, driven by higher rates effective in October 2015 and lower capex till 2017. Fitch expects debt-to-EBITDAR to improve to 3.5x and EBITDAR interest coverage to exceed 5x in 2016-2017.

Parent/Subsidiary Rating Linkage: KG&E is a wholly owned operating utility of WR, and its ratings are the same, reflecting highly centralized operations 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 FMBs.

KEY ASSUMPTIONS

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

--Net annual rate increase of $78 million effective Oct. 28, 2015 in accordance with KCC ruling.

--FERC approval of the settlement of 10.3% ROE and $10 million-$20 million annual increase in revenues from growing FERC-regulated portfolio of assets.

--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

Positive rating sensitivities:

A positive rating action is unlikely as the current ratings already incorporate the modest deleveraging over the 2015-2017 period. However, future positive rating actions would be likely if WR strengthened its balance sheet beyond Fitch's expectations, including EBITDA leverage declining to 3.3x or less on a sustainable basis.

Negative rating sensitivities:

An adverse shift in the regulatory compact, including prolonged elevated environmental spending without supportive recovery mechanisms, could trigger negative rating actions. A change in management strategy, meaningfully higher capex, or prolonged unexpected plant outage at a major base load could also negatively impact WR's credit profile.

LIQUIDITY

Ample Liquidity and Modest Maturities: WR has $1 billion of revolving credit available through $730 million and $270 million bank facilities that mature in September 2019 and February 2017, respectively. The bank facilities support a commercial paper (CP) 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 FMBs. WR had $292 million of CP outstanding and no borrowings under either credit facility at Oct. 27, 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.

Date of Relevant Committee: Oct. 1, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993509

Endorsement Policy

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

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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
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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