Fitch Downgrades Wisconsin Gas' IDR to 'A-'; Affirms Wisconsin Energy
Corp.'s IDR at 'A-'
NEW YORK -- June 14, 2013
Fitch Ratings has downgraded Wisconsin Gas LLC's (WI Gas) Long-term Issuer
Default Rating (IDR) to 'A-' from 'A', and affirmed the short-term IDR at
'F1'. Fitch has also affirmed the ratings of Wisconsin Energy Corp. (WEC) and
subsidiaries: Wisconsin Energy Capital Corp. (WECC), Elm Road Generating
Station Supercritical LLC (ERGSS), and Wisconsin Electric Power Co. (WEPCO).
The Rating Outlook remains Stable for all entities. A full list of ratings
follow at the end of this release.
KEY RATING DRIVERS
Downgrade of WI Gas:
The ratings downgrade reflects WI Gas' weaker financial profile over the
forecast period, resulting in credit protection measures that are more
consistent with Fitch's target ratios for the 'A-' rating category.
Specifically, Fitch models the ratios of debt/EBITDA and funds from operations
(FFO)/debt to average about 4.0x and 17%, respectively, over the 2013 - 2016
time frame. By contrast, for the latest 12 months (LTM) ended March 31, 2013,
debt/EBITDA was 3.4x and FFO/debt was 28.7%. The credit deterioration stems
from the incremental leverage needed to finance a capital spending program
that is running higher than historical norms.
WI Gas will need to file a general rate case with the Public Service
Commission of Wisconsin to earn a cash return on its investments, and cash
flow metrics will be stressed during the forecast period. It is Fitch's
expectation that WEC, WI Gas parent holding company, will inject cash to WI
Gas to support the company's funding needs in this period of high capex.
Over the 2013 - 2015 time frame, Fitch expects capital spending to total
approximately $523 million, compared with $277 million over the last three
years. The sizeable capital spending plan targets investments to upgrade WI
Gas' base infrastructure and to meet growing natural gas customer demand in
the Western part of Wisconsin. Management estimates the initial cost of the
Western gas expansion project to be in the range of $150 million to $170
million, with the bulk of spending to occur in 2015.
Constructive rate decisions that allow adequate recovery of planned capital
investments will be critical to avoid a further decline of the credit profile,
in Fitch's view. In WI Gas' last rate decision in December 2012, the company
was ordered a gas rate decrease of approximately $34 million, with new rates
effective Jan. 1, 2013. The order was based on a 10.5% return on equity (ROE)
and a 47.5% common equity ratio.
Affirmation of WEC:
Key rating factors include:
--A predictable business model with ownership of two low-risk regulated
--Constructive regulatory compact in Wisconsin;
--Solid financial profile for the rating category;
--Ample liquidity including a free cash flow positive position over the
--Sustained elevated capex.
Predictable Business Model
WEC's credit profile reflects the predictable cash flows of its two low-risk
regulated operating subsidiaries, Wisconsin Electric Power Co. (WEPCO; 'A'
IDR) and WI Gas. For the LTM period ended March 31, 2013, WEPCO contributed
85% to total consolidated revenue and WI Gas, 14%. Each of the utilities
operates with a fuel and purchased power recovery mechanism that limits
commodity exposure and cash flow volatility and lowers business risk.
Constructive Regulatory Compact
Rate design mechanisms in Wisconsin are supportive of credit quality,
including above-average authorized ROEs, the use of forward-looking test
years, inclusion of a healthy equity component in WEPCO's capital structure,
and a partial cash return on construction work in progress (CWIP).
Additionally, the favorable regulatory treatment of WEPCO's Power the Future
(PTF) leases allows the utility to fully and unconditionally recover in retail
rates the rental payments made to an affiliate as part of the long-term leased
generation contract for the four PTF plants.
Fitch considers the outcome of WEPCO's most recent rate case to be
constructive and consistent with current ratings. On Dec. 21, 2012, WEPCO was
granted a two-step net rate increase for its electric customers of
approximately $115 million effective in January 2013, and $73 million
effective in January 2014. The rate order was based on a 10.4% ROE and a 51%
common equity ratio.
The net rate increases incorporate a renewable energy tax grant offset
generated by WEPCO on its investment in the Rothschild biomass plant. The rate
request was driven by previously authorized investments in pollution control
equipment at the Old Creek units and renewables projects, and the finalization
of PTF Oak Creek expansion costs.
Solid Credit Metrics
WEC's credit protection measures are consistent with Fitch's target ratios for
the 'A-' rating category. For the LTM period ended March 31, 2013,
FFO/interest and FFO/debt were 4.9x and 21%, respectively. Fitch models credit
metrics to remain at or near current levels over the 2013-2016 time period.
Fitch expects periodic tariff increases and growing rate base additions from
utilities' capital investments to continue to be the main drivers of WEC's
solid financial performance.
Ample Liquidity and Free Cash Flow Positive
Fitch deems WEC's liquidity to be adequate to meet working capital and other
short-term funding needs. WEC has access to a total of $400 million under a
five-year bank credit facility that matures in December 2017. WEPCO and WI Gas
have separate credit facilities of $500 million and $350 million,
respectively. As of March 31, 2013, there were approximately $323 million of
consolidated borrowings outstanding, and WEC had approximately $25 million of
cash on hand.
Fitch considers consolidated debt maturities to be manageable with $375
million due in 2013, $300 million due in 2014, and $375 million due in 2015.
Fitch expects WEPCO and WI Gas to continue to enjoy ample access to the
capital markets and refinance debt obligations as they become due.
Favorably, Fitch projects WEC to be free cash flow positive over the forecast
period, which provides further liquidity support if required. WEC's favorable
cash position stems from the benefit of various tax credits and the use of net
operating loss carry forwards. Fitch anticipates WEC to allocate cash towards
supporting the utilities' capex programs, increasing dividends, executing
opportunistic share repurchases, and further reducing parent-level debt.
Elevated Capital Spending
While the completion in early 2011 of a sizeable multi-year generation
expansion program (PTF) has reduced financial pressure, Fitch expects capex to
remain at elevated levels as management projects spending in the range of $3.2
billion to $3.5 billion over 2013-2017. Capex primarily targets low-risk rate
base growth projects that should receive favorable regulatory treatment, in
Fitch's view. Fitch believes timely and adequate recovery of capital
investments will be critical to WEC maintaining its current rating profile.
Fitch expects WEC to use a balanced mix of internally generated funds anddebt
to support funding needs.
ERGSS ratings reflect the strong linkage with Wisconsin Electric Power Co.
(WEPCO, 'A' IDR). ERGSS services its debt obligations with lease rental
payments from WEPCO. As such, the ratings of ERGSS reflect the credit quality
WECC was the funding vehicle for WEC's former non-regulated operations. The
debt obligations of WECC are supported by an agreement with WEC. As such, the
ratings of WECC reflect the credit quality of WEC.
Fitch issued a separate press release discussing the affirmation of WEPCO's
ratings with a Stable Outlook. Please refer to Fitch's press release titled
'Fitch Affirms Wisconsin Electric Power Co.'s IDR at 'A'; Outlook Stable'
dated June 11, 2013 for additional details.
WEC: A sustained period of elevated capex and need for periodic rate relief
limit prospects of a positive rating action at this time.
Unfavorable rate decisions that would hinder the utilities' ability to earn an
adequate return of and on capital investments could pressure financial metrics
and lead to negative rating actions.
WI Gas: Weaker than currently forecasted credit metrics could lead to further
negative rating actions.
Fitch has downgraded the following ratings:
--Long-term IDR to 'A-' from 'A';
--Senior unsecured debt to 'A' from 'A+'.
Fitch has affirmed the following ratings with a Stable Outlook:
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--Junior subordinated debentures at 'BBB';
--Short-term IDR and commercial paper (CP) at 'F2'.
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-'.
--Long-term IDR at 'A';
--Senior unsecured debt at 'A+'.
--Short-term IDR and CP at 'F1'.
--IDR at 'A';
--Senior unsecured debt at 'A+';
--Preferred stock at 'A-';
--Short-term IDR and CP at 'F1'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16,
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
Short-Term Ratings Criteria for Non-Financial Corporates
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Philippe Beard, +1 212-908-0242
Fitch Ratings, Inc.
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Glen Grabelsky, +1 212-908-0577
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Brian Bertsch, +1 212-908-0549
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