Fitch affirms American Transmission ratings

NEW YORK, Jul 26, 2012 (BUSINESS WIRE) — Fitch Ratings has affirmed the ratings of the American Transmission Company (ATC) as follows:

–Issuer Default Rating (IDR) at ‘A’;

–Senior unsecured debt at ‘A+’;

–Short-term IDR and commercial paper at ‘F1’.

The Rating Outlook is Stable. Approximately $1.6 billion of debt is affected by today’s actions.

Key Rating Drivers Include: ATC’s low business risk profile as a regulated electric transmission utility with no significant volume, commodity, or weather sensitivity. ATC operates under a Federal Energy Regulatory Commission (FERC) approved tariff structure that ensures cash flow stability with automatic annual updates to forward-looking rates, subject to an annual true-up, allowances for construction work in progress (CWIP) and expensing of pre-certification costs, and a 12.2% allowed return on equity.

At the state level, ATC benefits from a supportive regulatory environment in Wisconsin where the majority of its assets are located and is subject to regulatory oversight by the Public Service Commission of Wisconsin (PSCW) for project siting and construction. The ratings also take into consideration ATC’s conservative funding strategy for capital expenditures based upon a balanced mix of debt and equity from contributing members.

ATC continues to demonstrate strong operating performance and stable cash flows. The company posted ratios of EBITDA to interest of 5.2 times (x) for the 12-month period ended March 31, 2012. Leverage, as measured by the ratio of debt to EBITDA, was 4.0x for the same time period. Fitch expects credit metrics to remain consistent at or near current levels over the next several years as ATC continues to add new assets into rate base. Going forward, Fitch projects EBITDA to interest and debt to EBITDA to average 5.1x and 4.1x, respectively, through 2016.

Rating concerns primarily relate to ATC’s significant capital spending budget over the next 10 years. The company has already identified approximately $3.8 billion to $4.4 billion in potential growth projects. Additional projects to meet federal or state renewal portfolio standards may result in increased external funding requirements. Fitch notes that ATC is privately held by a consortium of utilities and has no direct access to equity.

While annual capex is currently forecasted to average approximately $286 million through 2014, Fitch expects significantly higher capital spending levels in 2015 and 2016 as the planned Bay Lake and Badger Coulee transmission projects reach the construction phase. The large capital expenditure increase can primarily be attributed to the new Bay Lake transmission project and to a lesser extent, the planned Badger Coulee transmission line.

The proposed Bay Lake transmission project will improve the stability and reliability of the regional electrical grid in northern Wisconsin and the Upper Peninsula of Michigan and help facilitate additional transmission into Michigan. ATC currently plans to file for approval with the PSCW and the Michigan Public Service Commission in late 2013 or early 2014 and a decision is expected in late 2014 or first quarter of 2015. The total project is expected to cost $744 million dollars and if approved, construction is expected to start in 2015 to meet a currently scheduled in service date of 2016.

The proposed Badger Coulee Line from La Crosse to Madison, Wisconsin will support the transfer of renewable energy into Wisconsin to help meet public policy goals in the state as well as the greater Midwest region. ATC currently expects to file an application to build the line with the PSCW in 2013, and the project is currently estimated to cost $425 million. If approved, construction on the new line would begin in 2016 to meet an in-service date of 2018. This project qualifies for Midwest Independent System Operator’s (MISO) Multi Value Project cost methodology, which would spread the cost of the project across the entire MISO region, with ATC customers paying about 10% to 15% of the project’s total cost.

Fitch expects increased levels of capital spending to be funded with the same balanced mix of debt and equity of prior years and for management to maintain a capital structure of approximately 50%-55% debt to equity.

Additional Rating Concerns Include: The potential loss of member support for equity financing, and the potential for unfavorable revisions to the current rate structure after Dec. 31, 2012, as intervenors can request a change in the tariff at that time.

Fitch notes that ATC has revenue concentration among its five largest customers, who collectively comprise over 90% of ATC’s total revenues on an ongoing basis. Mitigants to customer concentration include the essential nature of ATC’s network service to the business of its customers in addition to a solid customer credit profile. The three largest customers/shareholders include Wisconsin Electric Power Co. (WEPCO, IDR: ‘A’, Outlook Stable), Wisconsin Power & Light Co., and Wisconsin Public Service Corporation.

The Stable Outlook assumes that ATC will continue to finance capital expenditures with a prudent mix of debt and equity to maintain credit metrics that are commensurate with their rating category and that the regulatory environment will continue to support cash flow stability.

Fitch views ATC’s liquidity position to be sufficient. The company has access to short-term liquidity through a three-year $300 million unsecured revolving credit facility that matures in January 2014. The facility provides backstop support for the company’s commercial paper program. As of March 31, 2012, ATC had $226 million of commercial paper outstanding. Debt maturities are manageable and are expected to be refinanced upon expiry. ATC has no maturities through 2014 and $100 million of senior notes due in 2015.