Fitch Affirms Ratings for American Transmission Co.; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of the American Transmission Company (ATC) as follows:

--Issuer Default Rating (IDR) at 'A';

--Senior unsecured debt at 'A+';

--Short-Term IDR and commercial paper (CP) at 'F1'.

The Rating Outlook for the company is Stable. Approximately $1.5 billion of debt is affected by today's actions.

ATC's ratings are based upon its low business risk profile as an electric transmission utility with no significant volume, commodity, or weather sensitivity. A Federal Energy Regulatory Commission (FERC) approved tariff structure ensures cash flow stability with automatic annual updates to forward-looking rates, subject to an annual true-up, allowances for construction work in progress (CWIP) and pre-certification costs, and a 12.2% return on equity. At the state level, ATC benefits from a supportive regulatory environment in Wisconsin where the majority of its assets are located. The Public Service Commission of Wisconsin (PSCW) regulates ATC for siting transmission infrastructure. The ratings also take into consideration ATC's conservative funding strategy for capital expenditures based upon a balanced mix of debt and equity from contributing members.

Cash flow coverage is strong relative to business risk with funds from operations interest coverage of 4.8 times (x) and EBITDA to interest of 4.9x for the 12 months ending March 31, 2010, while leverage, as measured by debt to EBITDA, is moderately elevated at 3.8x. Fitch expects credit metrics to remain consistent with the ratings category throughout the forecast period as new assets added to the rate base should maintain healthy cash flows. As such, EBITDA to interest and debt to EBITDA are projected by Fitch to average 4.9x and 3.8x, respectively, through 2013.

ATC has a significant capital spending budget over the next 10 years. The company has already identified approximately $2.5 billion in growth projects, excluding projects to meet federal or state renewal portfolio standards, the cost of which will be considerable and result in increased external funding requirements. While annual capex is currently forecasted to average approximately $260 million through 2013, Fitch expects a higher than average capex budget beginning in 2014 as the planned Badger Coulee Line (from La Crosse to Madison) reaches the advanced planning stage over the next several years, assuming timely permitting and other approvals. The proposed transmission line would support the transfer of renewable energy into Wisconsin to help meet public policy goals in Wisconsin and the greater Midwest region. ATC currently expects to file an application to build the line with the PSCW in 2013. If approved, construction on the new line would begin in 2015 to meet an in-service date of 2018. Fitch's rating assumes higher capital spending to be funded with the same balanced mix of debt and equity of prior years to maintain a capital structure of approximately 54%-55% debt. A change in the company's historically conservative funding structure would place pressure on its ratings. Other rating concerns include potential loss of member support for equity financing and any adverse revisions to the current rate structure in 2012, at which time intervenors can request a change in the tariff.

Fitch also notes that ATC has revenue concentration among the three largest customers, who collectively comprised 80% of total revenues in 2009. Mitigants to customer concentration include the essential nature of ATC's network service to the business of its customers in addition to a solid customer credit profile. The three largest customers/shareholders include Wisconsin Electric Power Co. (WEPCO; Fitch IDR of 'A', with a Stable Outlook), Wisconsin Power & Light Co., and Wisconsin Public Service Corp. (WPS).

The Stable Outlook assumes that ATC will continue to finance capital expenditures with debt and off-setting equity to maintain credit metrics that are commensurate with the 'A' ratings category guidelines and that the regulatory environment and member support will continue to support cash flow stability.

ATC has sufficient access to short-term liquidity through a $240 million revolving credit facility that matures in May 2011. The facility provides backstop support for the company's CP program. As of March 31, 2010, ATC had $123 million of CP outstanding. Debt maturities are manageable relative to cash flow and are expected to be refinanced. ATC has no maturities due in 2010, $310 million in 2011, $0 due in 2012-2014, and $100 million due in 2015.

Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:

--Credit Rating Guidelines for Regulated Utility Companies (July 31, 2007);

--Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector (Nov. 7, 2005);

--U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines (Aug. 22, 2007);

--Corporate Rating Methodology (Nov. 24, 2009).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Credit Rating Guidelines for Regulated Utility Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=254848

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

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