Fitch Rates Westar's FMBs 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings rates Westar Energy's (WR) $180 million offering of 4.10% Series due 2043 first mortgage bonds (FMBs) 'A-'. Proceeds from the offering will be used to retire debt and for working capital and general corporate purposes. The Rating Outlook is Stable.

KEY RATING DRIVERS:

--A generally balanced regulatory environment in Kansas;

--A conservative strategy focused on Kansas utility operations;

--Significantly lower post-2014 capex and improving credit metrics.

Low Risk Profile: The ratings and Stable Rating Outlook reflect WR's relatively predictable earnings and cash flows, management's conservative strategic focus on utility operations in Kansas, a service territory economy not prone to boom-bust cycles and competitive retail rates.

WR's constructive, integrated business model and balanced regulatory/political environment in Kansas supports the utility's creditworthiness. The utility's credit metrics are consistent with its 'BBB' IDR, given its relatively low risk profile.

Balanced Regulatory Compact: In recent years, WR has worked with the KCC and policy makers to implement tariff mechanisms designed to recover costs outside of GRCs, reducing regulatory lag. These riders include the following: a fuel adjustment mechanism (adjusted quarterly and trued-up annually); environmental cost recovery rider, FERC formula rate rider; and property tax adjustment.

In addition, deferral mechanisms are deployed for storm damage and other costs, including pension and energy efficiency. Single-issue rate cases are also permissible under state law and capex for major projects may be approved in advance. In Fitch's opinion, these regulatory mechanisms streamline GRC proceedings, reduce risk and potential rate lag and are key factors supporting WR's creditworthiness.

Improving Credit Metrics: WR's large capex program, which includes significant environmental investment, has exerted moderate pressure on the utility's consolidated credit metrics that is expected to continue through 2014. Fitch expects WR's capex to decline in 2015 and 2016, reflecting completion of its large environmental remediation program.

Lower future capex, coupled with anticipated rate relief is expected by Fitch to support strengthening credit metrics in 2015 - 2016. WR is expected to fund its external requirements on a conservative basis and has entered into forward equity agreements to maintain a balanced capital structure.

Capex: WR's capital investment is estimated to approximate $3.4 billion 2014 - 2018. During this period, capex peaks at $814 million and hitting an expected low of $591 million in 2016. WR's capex is expected to average $657 million during 2015 - 2018, compared to $780 million and $814 in 2013 and 2014, respectively, approximately 80% of peak 2014 capex.

WR's transmission investment is expected to rise sharply from $169 million in 2013 to $228 million in 2017. Transmission investment during 2014 - 2018 is estimated at $1 billion. During the same time period, WR plans to invest $826 million in new generation and $756 million in its distribution system.

GRC: WR plans to file its next general rate case (GRC) with the Kansas Corporation Commission (KCC) in the spring of 2015. Fitch expects that new rates would be effective Jan. 1, 2016, give or take a month.

The GRC is expected to seek recovery of remaining costs related to environmental work at the La Cygne generating facility which is 50% owned by WR. In addition, the GRC will seek recovery of investment and expense related to generation and distribution system infrastructure investment.

In Nov. 2013, the KCC issued an order that authorized WR to increase rates $30.7 million to recover La Cygne environmental upgrade costs in the utility's abbreviated rate case filing.

RATING SENSITIVITIES

An adverse shift in the currently balanced regulatory compact in Kansas could trigger future negative rating actions. More specifically, a restrictive outcome in WR's GRC resulting in lower-than-expected earnings and cash flows and, ultimately, weaker credit ratios in 2016 would likely lead to future credit rating downgrades.

A change in management's current strategy and/or higher-than-expected capex could also lead to future adverse credit rating actions.

In addition, an unexpected, prolonged plant outage at a major base load, coal or nuclear plant or change in strategy could lead to lower credit ratings.

Any combination of these or other factors resulting in a FFO-lease adjusted leverage to 5.1x or below on a sustained basis could lead to future credit rating downgrades.

Greater than anticipated debt reduction and/or higher than expected rate increases could result in future positive rating actions.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including short-Term Ratings and Parent Subsidiary Linkage' Aug. 5, 2013;

--'Recovery Ratings and Notching Criteria for Utilities' Nov. 19, 2013;

--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1 212-908-0531
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, +1 212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1 212-908-0577
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA, +1 212-908-0531
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, +1 212-908-0351
Senior Director
or
Committee Chairperson
Glen Grabelsky, +1 212-908-0577
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com