NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned an 'A-' rating on Westar Energy , Inc.'s (Westar) pending $250 million issuance of first mortgage bonds (FMBs). The 4.125%, 30-year FMBs would rank pari passu with Westar's and affiliate Kansas Gas and Electric Company's ( KGE ) other secured debt and mature March 1, 2042.
The Rating Outlook is Stable.
Proceeds from the issuance would be used to repay commercial paper borrowings and for general corporate purposes.
The issuance is expected to close March 1, 2012.
Westar's ratings incorporate the following key factors:
--A constructive regulatory environment in Kansas that has improved in recent years;
--Management's focus on core utility operations and transmission projects;
--A moderately large capital spending program that includes a significant amount of required environmental upgrades at the utilities' coal-fired power plants.
Credit quality benefits from a constructive regulatory environment in Kansas and management's focus on core utility operations and transmission projects.
Low Rates and Constructive Regulation:
Westar and KGE's low rates for customers should mitigate impediments to continued balanced general rate case (GRC) outcomes from the Kansas Corporation Commission ( KCC ). Fitch expects the utilities to receive reasonable recovery in the ongoing GRC, which would become effective in May 2012, at levels sufficient to maintain current credit metrics.
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 environmental and transmission capex cost-recovery riders, each of which is expected to cover more than 20% of consolidated capex through 2013.
The KCC 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, Westar and KGE would be able to file an abbreviated rate case up to 12 months following a GRC order, which could enable the utilities to wait as late as April 2013 to start recovering these environmental compliance costs. Fitch expects full recovery to be likely.
Other cost recovery mechanisms authorized by the KCC include a retail energy cost adjustment (RECA) 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 taken efforts to strengthen the balance sheet. Generation, transmission, and environmental projects have been funded with a balanced mix of debt and equity, and the company's capital expenditure budget has been structured prudently and spread out over many years so as to not harm financial performance.
Fitch expects Westar's consolidated financial metrics to remain adequate, supported by constructive regulatory cost recovery mechanisms and a stable operating environment. Fitch anticipates Westar's EBITDA interest coverage to average around 4.0 times (x) and its funds from operations (FFO) to debt around 18% through 2013.
Ample Liquidity:
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 on Sept. 29, 2016 and a $270 million revolving credit facility that matures on Feb. 18, 2015.
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 being able to access public equity and debt even during turbulent markets, should give Westar and KGE sufficient financial flexibility in carrying out their construction projects.
Rating Linkage Between Westar and KGE:
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.
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. 12, 2011);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
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