NEW YORK--(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 at 'F1'.
The Rating Outlook is Stable. Approximately $1.9 billion of debt is affected by today's actions.
KEY RATING DRIVERS:
Supportive federal and state regulatory frameworks: ATC operates under a Federal Energy Regulatory Commission (FERC) approved tariff structure that 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% allowed return on equity. At the state level, ATC benefits from a supportive regulatory environment in Wisconsin where the majority of its assets are located and is subject to regulatory oversight by the Public Service Commission of Wisconsin (PSCW) for project siting and construction. 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.
Solid financial performance metrics: ATC continues to demonstrate strong operating performance and stable cash flows. The company posted ratios of EBITDA to interest of 5.0x for the 12-month period ended June 30, 2014. Leverage, as measured by the ratio of debt to EBITDAR, was 4.1x for the same time period. Fitch expects credit metrics to remain consistent at or near current levels over the next several years as ATC continues to add new assets into rate base. Going forward, Fitch projects EBITDAR to interest and debt to EBITDAR credit metrics to average 5x and 4.2x, respectively, through 2016.
Large multi-year capital investment program: Fitch's rating concerns primarily relate to ATC's significant capital spending budget over the next 10 years. The company has already identified over $3 billion in potential capital projects. Additional projects to meet federal or state renewal portfolio standards may result in increased external funding requirements. While annual capex is currently forecasted to average approximately $340 million through 2015, Fitch expects moderately higher capex budgets during 2016 through 2018 as the planned Bay Lake transmission project enters service and the Badger Coulee and Cardinal-Hickory Creek transmission projects reach the construction phase. Capital expenditures are forecasted to average $440 million during 2016 through 2018. Due to the large capex program Fitch expects ATC to remain moderately FCF negative over the forecast period.
The total cost of the Bay Lake transmission project is currently estimated to be between $427 million - $447 million, and if approved, construction is expected to begin in 2015 to meet in-service dates of late 2016 through 2019. The proposed Badger Coulee Line is currently estimated to cost between $540 million - $580 million, and if approved, construction would begin in 2016 to meet an in-service date of 2018. Xcel Energy Inc. (IDR rated 'BBB+'; Outlook Stable) through its electric utility subsidiary, Northern States Power Wisconsin, (IDR 'A-', Stable) will be a 50% partner on this project. The proposed Cardinal-Hickory Creek transmission project is currently estimated to cost $425 million, and if approved, construction is expected to begin in 2018 to meet an in-service date of 2020. ITC Holdings Corp. will be a 50% partner on this project.
Balanced Funding of Large Capex Plan: Fitch expects the increased level of capital spending to be funded with the same balanced mix of debt and equity as in prior years such that the company can maintain a capital structure of approximately 50% - 55% debt to total capital. As of June 30, 2014, ATC had a debt to total capital ratio of 54%. Fitch notes that ATC is privately held by a consortium of utilities and has no direct access to equity. Fitch has assumed that ATC's owners will continue to contribute equity as needed for it to maintain its present capital structure. ATC's board of directors authorized the company to request up to $75 million of additional capital through voluntary capital calls through 2014, including $40 million received through July. Fitch would view a potential loss of member support for equity financing negatively.
Potential Revisions to the Current Rate Structure: Fitch continues to monitor the complaint filings by several industrial customer groups at the FERC regarding transmission ROEs in the MISO region. On Nov. 12 of last year, MISO, ATC, ITC and other MISO transmission owners were named as respondents in the complaint filings that allege that the transmissions rates were no longer just and reasonable and are requesting MISO ROE be set to 9.15% (from 12.38%), equity ratio restricted to 50%, and that relevant ROE adders be discontinued. Fitch calculates every potential 10 basis point reduction in ROE would negatively impact earnings before members' income taxes by $2.3 million. Fitch's rating case assumes no change to the current level of authorized ROEs; however, there is adequate headroom in ATC's current financial metrics to absorb a modest reduction to authorized ROEs.
Customer Concentration: ATC has revenue concentration among its five largest customers, who collectively comprise over 75% ATC's total revenues on an ongoing basis. Mitigants to customer concentration include the essential nature of ATC's network service to its customers in addition to a solid investment grade customer credit profile.
Adequate Liquidity: Fitch views ATC's liquidity position to be sufficient. ATC had $136 million of available liquidity under its $350 million revolving credit facility as of June 30, 2014. The company has access to short-term liquidity through a five-year $350 million unsecured revolving credit facility that matures in December 2017. The facility provides backstop support for the company's commercial paper program. As of June 30, 2014, ATC had $214 million of commercial paper outstanding. ATC's debt maturities over the next five years are manageable and include $100 million of senior notes due 2015 and $200 million of senior notes due 2018. Fitch expects that maturing debt will be refinanced upon expiry.
RATING SENSITIVITIES
Positive Actions: No positive rating actions are expected at this time.
Negative Actions: The potential for material unfavorable revisions to the current rate structure due to challenges from intervenors, and/or sustained Debt to EBITDAR leverage metrics in the range of 4.3x to 4.5x over the forecast period, could cause negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Utilities, Power and Gas Companies (March 7, 2014);
--'Corporate Rating Methodology' (May 28, 2014);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
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
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=881514
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