NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Union Electric's (UE) new 3.65% $250 million issuance of senior secured notes due April 15, 2045. The Rating Outlook is Stable.
The new notes will rank pari passu with AIC's existing senior secured obligations. Net proceeds will be used to repay short-term debt, including short-term debt expected to be incurred in connection with the repayment at maturity of $114 million of 4.75% senior secured notes due April 1, 2015.
KEY RATING DRIVERS
Improving Regulatory environment: Fitch believes the Missouri compact has improved in recent years, featuring various trackers for major operating expenses and a fuel adjustment clause that contributes to earnings predictability. Furthermore, UE's last two electric rate cases resulted in rate increases that were close to 80% of initial requests. Nonetheless, regulatory lag due to the use of an historical test year in setting rates, the absence of CWIP in rate base, and an extended rate review period, continues to remain a credit concern.
Pending Electric Rate Case: UE is requesting an electric base rate increase of approximately $180 million based on a 10.4% ROE and 51.8% common equity ratio. The request is composed of recovery of $100 million of net energy costs and about $80 million of other costs, including the inclusion in rate base of the Callaway new reactor vessel head project and environmental expenditures at the Labadie plant completed in 2014. In March 2015, the staff recommended a base rate increase of $94 million based on a 9.25% ROE. A final decision by the MPSC is expected by May 2015 with new rates effective on May 31, 2015. Although not anticipated by Fitch, a less than balanced rate decision would likely bear not impact on credit ratings, given the relative headroom in UE's credit metrics for the current rating level.
Manageable Capex Program: Management estimates capex to range between $3.58 billion and $3.89 billion over 2015-2019 (approx. 2% annual rate base growth), including $710 million projected in 2015. By contrast, UE spent $3.22 billion over the 2010-2014 time frame. Capital spending is earmarked primarily towards the maintenance and upgrade of UE's generation, transmission, and distribution systems. Capex also includes modest investments to comply with existing environmental regulations. Management estimates environmental capex to be between $350 million and $400 million through 2019. UE typically recovers environmental spending via rate case proceedings or the use of accounting authority orders. Fitch does not anticipate any cost disallowances associated with projected environmental capex.
Robust Credit Metrics: Fitch expects UE's credit metrics to remain robust for the current rating category over the forecast period, supported by a base rate increase in 2015 and efficient cost control of base O&M. Fitch forecasts Adj. debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage to average 3.2x, 3.2x, and 5.2x, respectively, over 2015-2017. For the fiscal year ended Dec. 31, 2014, the ratios of Adj. debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage were 3.0x, 2.9x, and 5.8x, respectively. The modest projected decline in cash flow measures primarily reflects the expiration of bonus depreciation in 2014.
Fitch expects UE to finance capex in a conservative manner with a balanced mix of internally generated cash flows and long-term debt issuances. Fitch estimates internal cash flows to fund near 95% of capex over the next three years.
Adequate Liquidity: UE has access to a total of $800 million of credit capacity under a $1 billion bank credit facility that expires in Dec. 2019. UE shares the credit facility with its parent AEE, which has a sub-borrowing limit of $700 million. At Dec. 31, 2014, UE had $97 million of CP borrowings outstanding and $1 million of cash and cash equivalents. Additional liquidity is provided by an inter-company money pool that provides for short-term cash and working capital requirements. AEE is a lender only in the money pool. UE had no borrowings outstanding under the pool at Dec. 31, 2014. Long-term debt maturities are considered manageable with $120 million due in 2015 and $266 million due in 2016.
KEY ASSUMPTIONS
--Flat sales growth through 2017;
--Base O&M escalated at 2% per annum;
--Rate decision in the pending rate case results in an electric base rate increase near $140 million, representing mid-point of UE's amended rate request and Staff recommendation;
--Capex as projected by management.
RATING SENSITIVITIES
Factors that could lead to a positive rating action:
No positive rating action is anticipated in the near to intermediate term.
Factors that could lead to a negative rating action:
--Given UE's current financial profile, a less than balanced outcome in the pending rate case would likely not affect the ratings, in Fitch's view. However, a series of less than constructive rate decisions that signal a more permanent deterioration in the regulatory compact would likely lead to negative rating actions.
--Adjusted debt/EBITDAR ranging between 3.5x and 3.75x or FFO leverage ranging between 4x and 4.25x on a sustained basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982275
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