Fitch Rates Wisconsin Electric Power Co.'s $250MM Sr. Unsecured Debentures 'A+'
Fitch Ratings has assigned an 'A+' rating to Wisconsin Electric Power
Co.'s (WEPCO) new 4.3% $250 million issuance of senior unsecured
debentures due Dec. 15, 2045. The new debentures will rank equally with
WEPCO's existing senior unsecured obligations. Net proceeds will be used
to repay short-term debt and long-term debt that matures on Dec. 1,
2015, and for working capital and other corporate purposes.
KEY RATING DRIVERS
Balanced Rate Order: The rate decision in WEPCO's most recent rate case
was in line with Fitch Ratings' expectations, and provides earnings and
cash flow predictability through 2016, at levels consistent with the
utility's current financial profile. WEPCO received a net nonfuel
electric base rate increase of approximately $2.7 million in 2015. The
rate order also included System Support Resource (SSR) revenues of $90.7
million associated with the continued operation of the Presque Isle
plant in Michigan. The Public Service Commission of Wisconsin (PSCW)
allows escrow accounting for SSR revenue from MISO. The order was based
on a 10.2% return on equity (ROE) and a 51% common equity ratio. The
10.2% ROE is above the average authorized ROE granted to utilities in
2014.
Merger Concessions Neutral to Ratings: Fitch does not expect the
concessions resulting from the PSCW's approval of the merger to have a
material impact on WEPCO's credit profile. The PSCW required a
three-year earnings cap and sharing mechanism, effective in 2016, under
which 50% of the first 50 bps of earnings above the 10.2% authorized ROE
would be shared with ratepayers and used to reduce the company's
transmission escrow. All additional earnings above the first 50 bps will
be used to pay down the transmission escrow.
The merger terms in Michigan are manageable within WEPCO's existing
financial profile, in Fitch's opinion. The key provisions include WEPCO
retaining ownership of the Presque Isle Power Plant and its electric
distribution assets in the Upper Peninsula region, and the utility
either investing in and/or purchasing power from a new power plant if
requested, which would lead to the retirement of Presque Isle.
Sustained Elevated Capex: Management plans to spend in the range of $2.6
- $2.7 billion on utility capex over 2015 - 2019 compared with
approximately $2.9 billion over the previous five years, and earmarked
primarily toward the upgrade of WEPCO's electric and gas base
infrastructure. Projects are smaller in scope vis-a-vis the large
renewable generation and environmental-related spending of prior years.
Fitch expects WEPCO to continue receiving timely and adequate recovery
of capital investments through rate proceedings and has assumed utility
capex will be funded in a manner consistent with the authorized
regulatory capital structure.
Key projects include the conversion of the Valley Power Plant from coal
to natural gas for a total cost of approximately $60 million -- $62
million with a target completion date for November 2015, and the
construction of a new powerhouse at Twin Falls for an estimated cost of
approximately $60 million -- $65 million with a target completion date
in 2016. Both projects have received approval from the PSCW. The PSCW
also approved approximately $79 million of capex associated with
upgrades at the new Oak Creek plants that will permit WEPCO to burn both
Powder River Basin and bituminous coal at the plants.
Modestly Declining Credit Metrics: Fitch forecasts credit metrics to
modestly decline over the forecast period, but remain adequate for the
current rating level. Fitch forecasts WEPCO's debt/EBITDAR to range
between 3.4x and 3.7x over 2015 -2019, while funds FFO-adjusted leverage
is expected to range between 4.3x and 3.8x. Debt/EBITDAR and
FFO-adjusted leverage stood at 3.4x and 3.8x, respectively, for the LTM
ended Sept. 30, 2015.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Base rate increases in 2015 and 2016 per the last rate order
--Retail sales growth of 0.5% annually
--$2.6 billion capex 2015 - 2019
--No financial impact from merger concessions
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a
positive rating action:
Given current rating levels and a sustained elevated capex program over
the forecast period, positive rating actions are unlikely in the near
term.
Future developments that may, individually or collectively, lead to a
negative rating action:
--Although not anticipated by Fitch, a deterioration of the regulatory
compact could lead to negative rating actions;
--Debt/EBITDAR at or over 4.0x on a sustained basis.
Date of Relevant Rating Committee: August 14, 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
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