Fitch Rates WEPCO's $250MM Debentures 'A+'
NEW YORK -- December 06, 2012
Fitch Ratings has assigned an 'A+' rating to Wisconsin Electric Power Co.'s
(WEPCO) new $250 million issue of 3.65% senior unsecured debentures due Dec.
15, 2042. The Rating Outlook is Stable. The new debentures will rank equally
with WEPCO's other senior unsecured debt. Proceeds will be used to repay
short-term debt and for working capital and other general corporate purposes.
Key Ratings Drivers
Cash Flow Stability
WEPCO's credit profile reflects the predictable cash flows of its regulated
electric, gas, and steam businesses. Each of the businesses operate with a
fuel and purchased power recovery mechanism that limits commodity price
exposure and cash flow volatility and lowers business risk.
Solid Credit Measures
WEPCO's ratings are supported by credit protection measures that are
consistent with Fitch's target financial ratios for those issuers rated with
an 'A' Issuer Default Rating (IDR). Fitch expects the ratio of EBITDA/Interest
to approximate 5.7 times (x), and Debt/EBITDA, 3.7x, over the 2012 - 2016 time
Constructive Regulatory Compact
The tariff structure in Wisconsin is favorable with above-average authorized
returns on equity (ROEs), the use of forward-looking test years, a healthy
equity component in the capital structure, and a partial cash return on
construction work in progress (CWIP).
On Nov. 28, 2012, WEPCO was granted a two-step net rate increase for its
electric customers of approximately $115 million in 2013 and $75 million in
2014, including an authorized 10.4% return on equity. The net rate increases
incorporate renewable energy tax grant offsets generated by WEPCO for its
investments in the Rothschild biomass facility and other renewables.
The rate increase reflects cost recovery of previously-approved investments in
pollution-control equipment at the old Oak Creek units, the Glacier Hills Wind
Park project which went online in December 2011, construction costs at the
Rothschild biomass plant, and the finalization of Oak Creek PTF expansion
A final written order by the Wisconsin Public Service Commission is expected
by the end of December 2012.
Fitch believes the rate decision to be supportive of projected credit metrics.
WEPCO's liquidity is supported by a $500 million bank credit facility that
expires in December 2013. At Sept. 30, 2012, there was $255.4 million of
borrowings outstanding under the credit facility, and WEPCO had $12.1 million
of cash on hand.
Fitch considers debt maturities to be manageable with $300 million due in
2013, $300 million due in 2014, and $250 million due in 2015.
Elevated Capital Spending
Capital investments are expected to approximate $2 billion over the 2012-2014
time frame. Capital spending will focus primarily on the upgrade of WEPCO's
aging distribution infrastructure, with investments in renewables and
pollution control equipment at the old Oak Creek units near completion.
Fitch expects WEPCO to use a balanced mix of internally generated cash flows
and debt issuances to support funding needs, and the company should continue
to have ample access to capital markets.
WHAT COULD TRIGGER A RATING ACTION
Positive Rating Actions
No positive rating action is anticipated in the near term.
Negative Rating Actions
--Inability to recover future capital investments on a timely basis could have
a negative impact on ratings.
--A decline on a sustainable basis in EBITDA/interest below 5x and Debt/EBITDA
above 4x could lead to a rating action.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Philippe Beard, +1-212-908-0242
One State Street Plaza
New York, NY 10004
Philip W. Smyth, CFA, +1-212-908-0531
Glen Grabelsky, +1-212-908-0504
Brian Bertsch, +1-212-908-0549 (New York)
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