NEW YORK--(BUSINESS WIRE)--Wisconsin Energy Corp. (WEC) cleared a significant hurdle in getting its proposed acquisition of Integrys Energy Group, Inc. (Integrys) approved in the state of Michigan following a settlement agreement reached with several parties, including the state Governor, the Michigan Public Service Commission (MPSC) staff, and Upper Peninsula Power Co. (UPPCO). In Fitch's view, the agreement bears no impact on WEC's ratings.
Under the agreement, Wisconsin Electric Power Co. (WEPCO), a subsidiary of WEC, and Wisconsin Public Service Co. (WPS), a subsidiary of Integrys, will sell their Michigan electric utility businesses to UPPCO, including WEPCO's ownership of the coal-fired Presque Isle Power Plant (PIPP), which WEPCO was planning to retire for economic reasons. The sale would take effect contemporaneously with the closing of the WEC-Integrys merger, expected to be sometime in the second half of 2015. The financial terms of the sale to UPPCO have not been disclosed but given that the Michigan electric utility businesses were a small part of both WEPCO and WPS, Fitch expects the sale to be neutral to their credit profile.
The settlement agreement resolves concerns some interveners, including the Michigan Governor and AG, had raised that the Integrys deal would leave the combined company with too much market power in the supply-constrained Upper Peninsula (UP) region. Importantly, upon the acquisition of PIPP by UPPCO, the System Support Resource (SSR) payments WEPCO receives for operating PIPP and maintaining grid reliability in the UP region will be terminated. Under the terms of the current retirement SSR agreement, the utility would have collected approximately $97 million of SSR payments in 2015 to keep PIPP online. A majority of this payment is expected to be funded by customers in the Upper Peninsula region leading to backlash.
In Fitch's opinion, assuming a mid-year merger close, the termination of SSRs would likely be cash flow neutral to WEPCO, due to the accounting treatment received in the 2015 rate order, which would be resolved in a future rate proceeding.
Fitch placed WEC's ratings on Negative Watch in June 2014 following the Integrys acquisition announcement due to expectations of increasing leverage and projected weaker pro forma credit metrics for the current rating category. Fitch forecasts pro forma funds from operations (FFO) lease-adjusted leverage in the first full year of operation to be approximately 4.7x and adjusted debt/EBITDAR near 4.4x. WEC's stand-alone FFO lease-adjusted leverage is projected to be closer to 4x and adjusted debt/EBITDAR closer to 3.5x.
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