Fitch Rates Westar's $250MM First Mortgage Bond Issuance 'A-'; Outlook
NEW YORK -- March 22, 2013
Fitch Ratings has assigned an 'A-' rating to Westar Energy Inc.'s (Westar)
$250 million issuance of 4.10% series first mortgage bonds, due April 1, 2043.
Proceeds from the sale will be used to fund the company's ongoing capital
program, working capital, and general corporate purposes. The new notes rank
equally in right of payment with existing senior secured obligations of
Westar. The Rating Outlook is Stable.
KEY RATING DRIVERS:
--A balanced regulatory environment in Kansas;
--Management's focus on core utility operations;
--A moderately large capital spending program that includes a significant
amount of required environmental upgrades at the utilities' coal-fired power
Low Rates and Constructive Regulation:
Westar and Kansas Gas and Electric's (KGE) low customer rates should allow for
continued balanced general rate case (GRC) outcomes from the Kansas
Corporation Commission (KCC). Fitch expects cash flows to improve modestly
this year, due to the $50 million rate increase that went into effect late
April 2012. Westar will be filing an abbreviated rate case by April 2013 in
order to begin recovering costs associated with the La Cygne Generating
Station's environmental upgrades.
Cost Recovery Mechanisms:
The KCC and the Federal Energy Regulatory Commission (FERC) allow Westar and
KGE to use cost-recovery mechanisms for certain expenditures, which decreases
regulatory lag and provides stability to the financial profile. Of particular
importance are the environmental cost recovery rider (ECRR) and the
FERC-approved transmission formula rate, each of which is expected to cover
just under 20% of consolidated capex through 2013.
The KCC previously ruled against the ECRR being used for environmental capex
over the next few years at the La Cygne Generating Station, due to it being
jointly-owned by and solely operated by Kansas City Power & Light, a
subsidiary of Great Plains Energy Inc. (not rated by Fitch). However, Fitch
expects full recovery of the pre-approved capex in WR's abbreviated rate case
filing and, ultimately, the utilities' next GRC filing.
Other cost recovery mechanisms authorized by the KCC include a retail energy
cost adjustment mechanism for fuel and purchased power, and a pension and
other post-employment benefits expense tracker.
Focus on Utility Operations:
Management remains focused on Westar and KGE's core utility operations and has
strengthened the balance sheet. Generation, transmission, and environmental
projects have been funded with a balanced mix of debt and equity, and the
company's capex budget has been structured prudently and spread out over many
years so as to mitigate the impact on financial performance.
Fitch expects Westar's consolidated financial metrics to be strained through
2014 from costs associated with EPA-mandated environmental upgrades to WR's
coal-fired generating facilities. Total capex is expected to peak in 2013 at
approximately $900 million, with the bulk of the environmental spending
expected to be completed by 2014. In 2015, Fitch expects capex to return to
the recent historical average of roughly $600 million.
Fitch anticipates Westar's EBITDA interest coverage to average greater than
4.0 times (x) through 2015. Funds from operations (FFO) to debt is expected to
be temporarily depressed at around 15% - 16% through 2014 during this period
of heightened capital spending, before starting to recover to stronger levels
Westar and KGE have a solid liquidity position, and Westar's new commercial
paper program should enable the utilities to access the short-term debt
markets at attractive rates. The commercial paper is supported by a $730
million revolving credit facility that matures in September 2016 and a $270
million revolving credit facility that matures in February 2016.
Subject to lender participation, each of these revolving credit facilities can
be extended up to two years and has an accordion feature that would allow for
up to $400 million in aggregate of additional borrowing capacity. Ample
availability under these facilities, along with the utilities' history of
readyaccess to public equity and debt markets even during turbulent markets,
should give Westar and KGE sufficient financial flexibility to execute their
The credit ratings for Westar and KGE are the same, reflecting centralized
operations and treasury functions and a consolidated capital structure used
for ratemaking. Westar and KGE conduct business under the Westar Energy brand
name and have functionally integrated utility operations.
KGE relies on Westar for its short-term cash needs, and Westar's revolving
credit facilities are collateralized by KGE's first mortgage bond indenture.
Furthermore, no regulatory or corporate structures exist to restrict the
migration of cash between the two entities.
Although not likely in the near term, a strengthening of cash flows and/or a
decrease in debt could lead to a positive rating action.
Delays or cost overruns with existing or planned projects; an inability to
fully recover future expenditures possibly in connection with the La Cygne
upgrades; or additional unexpected cost increases related to the Wolf Creek
nuclear power plant may individually or collectively lead to future negative
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:
--Recovery Ratings and Notching Criteria for Utilities (November 2012);
--Corporate Rating Methodology (August 2012);
--Rating North American Utilities, Power, Gas, and Water Companies (May 2011).
Applicable Criteria and Related Research
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
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Philip W. Smyth, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Brian Bertsch, +1-212-908-0549 (New York)
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