Fitch Downgrades Wisconsin Public Service Corp.'s Senior Debt Securities to 'A+'

NEW YORK--()--Fitch Ratings has downgraded Wisconsin Public Service Corp.'s (WPS) existing individual senior secured debt securities ratings to 'A+' from 'AA-'. The rating action follows WPS' redemption of the remaining $0.1 million of first mortgage bonds (FMBs) due July 1, 2023. The redemption of the last FMBs outstanding activated a provision in the bond indenture that removed the collateral securing the existing senior notes and caused these notes to become unsecured obligations of WPS, hence triggering the one-notch downgrade.

KEY RATING DRIVERS

Restrictive Rate Outcome: The rate decisions in WPS' electric and gas rate cases are below what Fitch had initially anticipated and will stress the utility's financial performance over 2016 - 2017. WPS received rate reductions of $7 million and $6 million for its electric and gas businesses, respectively. The order reflects a 2016 forward test year and a 10% authorized ROE, which is below the 10.2% accorded in WPS' previous rate case and in recent Wisconsin peer utilities' rate cases.

Fitch had assumed rate relief that was closer to WPS' revised request for rate increases of $48 million (electric) and $4.4 million (gas). Fitch expects credit metrics to weaken by roughly half-a-turn over the next two years before bouncing back in the back-end of the forecast, assuming constructive regulatory treatment.

On a positive note, robust credit metrics on an LTM basis do provide some level of cushion to absorb the negative financial effect of the rate order. FFO-adjusted leverage and adjusted debt/EBITDAR were 3.2x and 3.4x, respectively. EBITDAR and FFO coverage ratios were both 6x.

The main drivers of the electric rate request included the recovery of environmental capex associated with the coal-fired Weston 3 plant and upgrades to Fox Energy Center units 1 and 2. The request also related to increased transmission costs allocated from ATC and MISO. Drivers of the gas rate request included recovery of spent capex and an increase in non-fuel O&M costs.

A final written order from the Public Service Commission of Wisconsin is expected in December 2015 with new rates effective Jan. 1, 2016.

Elevated Capex: The utility is spending approximately $345 million over 2013 - 2016 to install emission-control equipment at the coal-fired Weston 3 plant. Management projects to complete the project in early 2016. In addition, WPS plans on spending approximately $220 million over 2014 - 2018 as part of the System Modernization and Reliability Project.

In the context of merger provisions, WPS and its sister utility affiliate Wisconsin Electric Power Co. filed before the Public Service Commission of Wisconsin a joint integrated resource plan (IRP) for the utilities combined loads to evaluate the need for new generation capacity. As a result, WPS withdrew its application for a previously proposed $517 million 400 MW combined cycle plant at the Fox Energy site, and capacity needs will be reviewed in the context of the joint IRP.

Pressured Credit Metrics: Fitch expects FFO-adjusted leverage to range between 4.5x - 5x in 2016 - 2017, and improve to near 4x in 2018. Adjusted debt/EBITDAR is projected to approximate 4x over 2016-2017 and improve to 3.6x in 2018, assuming rate relief and cost control. The FFO-based metrics also reflect the negative cash flow effect from the expiration of bonus depreciation in 2014.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Additional rate relief over 2017 - 2019;

--Retail sales growth of 0.5% annually;

--$1.4 billion of capex over 2015 - 2019.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action:

Given current rating levels and declining headroom in credit metrics, positive rating actions are unlikely in the near term.

Future developments that may, individually or collectively, lead to a negative rating action:

--A series of unfavourable rate orders

--Debt/EBITDAR over 4.0x on a sustained basis.

LIQUIDITY

WPS has access to a combined capacity of $250 million under two separate unsecured revolving credit facilities that mature in June 2017 and May 2019. WPS had $102.1 million of commercial paper borrowings and $2.9 million of cash and cash equivalents at Sept. 30, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995214

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995214

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan
Senior Director
+1-212-908-0351
or
Committee Chairperson
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan
Senior Director
+1-212-908-0351
or
Committee Chairperson
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com