Fitch Rates Wisconsin Electric Power Co.’s $250MM Sr. Unsecured Debentures ‘A+’

Fitch Ratings has assigned an 'A+' rating to Wisconsin Electric Power Co.'s (WEPCO) new 4.3% $250 million issuance of senior unsecured debentures due Dec. 15, 2045. The new debentures will rank equally with WEPCO's existing senior unsecured obligations. Net proceeds will be used to repay short-term debt and long-term debt that matures on Dec. 1, 2015, and for working capital and other corporate purposes.

KEY RATING DRIVERS

Balanced Rate Order: The rate decision in WEPCO's most recent rate case was in line with Fitch Ratings' expectations, and provides earnings and cash flow predictability through 2016, at levels consistent with the utility's current financial profile. WEPCO received a net nonfuel electric base rate increase of approximately $2.7 million in 2015. The rate order also included System Support Resource (SSR) revenues of $90.7 million associated with the continued operation of the Presque Isle plant in Michigan. The Public Service Commission of Wisconsin (PSCW) allows escrow accounting for SSR revenue from MISO. The order was based on a 10.2% return on equity (ROE) and a 51% common equity ratio. The 10.2% ROE is above the average authorized ROE granted to utilities in 2014.

Merger Concessions Neutral to Ratings: Fitch does not expect the concessions resulting from the PSCW's approval of the merger to have a material impact on WEPCO's credit profile. The PSCW required a three-year earnings cap and sharing mechanism, effective in 2016, under which 50% of the first 50 bps of earnings above the 10.2% authorized ROE would be shared with ratepayers and used to reduce the company's transmission escrow. All additional earnings above the first 50 bps will be used to pay down the transmission escrow.

The merger terms in Michigan are manageable within WEPCO's existing financial profile, in Fitch's opinion. The key provisions include WEPCO retaining ownership of the Presque Isle Power Plant and its electric distribution assets in the Upper Peninsula region, and the utility either investing in and/or purchasing power from a new power plant if requested, which would lead to the retirement of Presque Isle.

Sustained Elevated Capex: Management plans to spend in the range of $2.6 - $2.7 billion on utility capex over 2015 - 2019 compared with approximately $2.9 billion over the previous five years, and earmarked primarily toward the upgrade of WEPCO's electric and gas base infrastructure. Projects are smaller in scope vis-a-vis the large renewable generation and environmental-related spending of prior years. Fitch expects WEPCO to continue receiving timely and adequate recovery of capital investments through rate proceedings and has assumed utility capex will be funded in a manner consistent with the authorized regulatory capital structure.

Key projects include the conversion of the Valley Power Plant from coal to natural gas for a total cost of approximately $60 million -- $62 million with a target completion date for November 2015, and the construction of a new powerhouse at Twin Falls for an estimated cost of approximately $60 million -- $65 million with a target completion date in 2016. Both projects have received approval from the PSCW. The PSCW also approved approximately $79 million of capex associated with upgrades at the new Oak Creek plants that will permit WEPCO to burn both Powder River Basin and bituminous coal at the plants.

Modestly Declining Credit Metrics: Fitch forecasts credit metrics to modestly decline over the forecast period, but remain adequate for the current rating level. Fitch forecasts WEPCO's debt/EBITDAR to range between 3.4x and 3.7x over 2015 -2019, while funds FFO-adjusted leverage is expected to range between 4.3x and 3.8x. Debt/EBITDAR and FFO-adjusted leverage stood at 3.4x and 3.8x, respectively, for the LTM ended Sept. 30, 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Base rate increases in 2015 and 2016 per the last rate order

--Retail sales growth of 0.5% annually

--$2.6 billion capex 2015 - 2019

--No financial impact from merger concessions

RATING SENSITIVITIES

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

Given current rating levels and a sustained elevated capex program over the forecast period, positive rating actions are unlikely in the near term.

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

--Although not anticipated by Fitch, a deterioration of the regulatory compact could lead to negative rating actions;

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

Date of Relevant Rating Committee: August 14, 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

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