Fitch: Westar Energy's General Rate Case Unlikely to Affect Ratings or Outlook

NEW YORK--()--Westar Energy's (WR) 2015 general rate case (GRC) with the Kansas Corporation Commission (KCC) has no immediate impact on WR or subsidiary Kansas Gas & Electric's (KG&E) ratings, according to Fitch Ratings. Fitch affirmed WR and KG&E's credit ratings June of last year and revised the Rating Outlook on the companies to Positive from Stable.

A final KCC decision consistent with Fitch's expectations would likely result in favorable resolution of the Rating Outlooks. Fitch anticipates a final decision and new rates effective around year-end 2015. A negotiated settlement is possible and a settlement conference is scheduled for Aug. 3-7. Intervenor testimony is due July 2015.

The Positive Rating Outlook reflects improving WR credit metrics based on Fitch's rating case projections, a supportive Kansas and FERC regulatory regime from a credit point-of-view, manageable capex, planned equity issuance and anticipates a balanced outcome in WR's 2015 GRC filing.

Fitch expects the rate case to be uncontroversial since large components of the requested rate hike are driven by Wolf Creek related life extension and pre-approved environmental investment. Fitch expects the final KCC order to be similar to historic outcomes in recent years supporting earned returns estimated in the 8.5%-9.5% range through 2017.

Fitch believes the Kansas regulatory regime is relatively balanced, supported by adoption, and consistent implementation, of regulatory mechanisms that include timely pass-through of key costs (fuel and purchase power, etc.) outside of GRCs and pre-approval of major capital projects.

Fitch's view of the Kansas regulatory compact is supported by reasonable outcomes in past rate cases and manageable regulatory lag as evidenced by historic earned returns ranging from 8.8%-9.9% 2010 through 2014. WR has reached stipulations with key intervenors in its past three GRC's that were ultimately authorized by the KCC with only modest modification.

An unexpectedly harsh outcome that includes disallowance of major costs in WR's 2015 GRC could trigger future credit rating downgrades. However, Fitch believes prospects for an adverse outcome in the instant GRC is a low probability event.

WR's 2015 GRC requests a $152 million (7.9%) rate increase based on a 12-month test year ended September 2014 and a 10% ROE. The rate increase is driven, in large part, by pre-approved La Cygne environmental and Wolf Creek life-extension investment. The filing also seeks recovery of other plant investment and O&M increases incurred since its last GRC in 2011.

The KCC has filed a complaint challenging WR's 11.3% FERC transmission return on equity (composed of a 10.8% base ROE and a 50 basis point adder for RTO membership). The KCC is seeking a 200 basis point reduction. The KCC action is a modest source of uncertainty from a credit point-of-view.

Fitch calculates that a one-percent change in transmission ROE could result in a change in pretax earnings of approximately $11.5 million. Timing of a FERC ruling in the proceeding is uncertain and discussions and settlement prior to hearings is a possibility.

RATING ASSUMPTIONS

--Compound annual sales growth of approximately one-percent per annum;

--KCC authorized rate increase effective Jan. 1, 2016 supporting earned ROEs estimated by Fitch of 8.5%-9.5%;

--Common equity issuance of $255 million in 2015;

--Capex approximating $690 million per annum 2015-2019, on average;

--Continued balanced Kansas regulatory regime.

RATING SENSITIVITIES

Moderation in WR's planned capex, new equity issuance and a final KCC order in WR's anticipated 2015 GRC resulting in EBITDA leverage improvement to 3.6x or better on a sustained basis would likely result in future positive rating actions.

Conversely, 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 weaker-than-expected earnings, cash flows and credit ratios in 2016 could result in future credit rating downgrades.

A change in management's current strategy and/or meaningfully 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 could lead to lower credit ratings.

Any combination of these or other factors resulting in EBITDA leverage weakening to 4.1x or worse on a sustained basis could lead to future credit rating downgrades.

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

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA
Senior Director
+1 212-908-0531
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1 212-908-0351
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA
Senior Director
+1 212-908-0531
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1 212-908-0351
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com