Moody’s Investors Service said May 31 that it is putting Great Plains Energy (NYSE:GXP) on review for downgrade following the announcement that the company will acquire neighboring Westar Energy (NYSE:WR) for over $12bn.
The deal also includes the assumption of about $4bn of Westar debt. Great Plains said the acquisition financing would include a mix of debt and equity.
At the same time, Moody’s affirmed the long-term and short-term ratings of Kansas City Power & Light Co. (KCPL), KCP&L — Greater Missouri Operations Co. (GMO) and Westar Energy with stable outlooks.
“Great Plains is sacrificing its strong financial profile to acquire its neighbor,” said Moody’s Vice President and Senior Analyst Ryan Wobbrock.
“This is a bigger is better merger, where Westar will help Great Plains double its assets. But, the financing plan will triple its debt, leaving little financial flexibility and is indicative of management’s higher tolerance for financial risk,” Wobbrock said in explaining the Moody’s rating action.
The addition of approximately $4.4bn of parent-level acquisition debt is likely to result in a one-notch downgrade, to Baa3, for Great Plains.
From a strategic perspective Moody’s sees Westar as a natural fit for Great Plains, given overlapping service territories and a shared ownership of the 1,170-MW Wolf Creek nuclear generation facility, Moody’s said.
Utilities with contiguous service territories tend to produce higher operating cost synergies. The primary credit benefit in acquiring Westar, is that Great Plains increases its exposure to the Kansas regulatory environment, Moody’s said.
Today, Moody’s views the Kansas Corporation Commission (KCC) to be slightly more supportive to long-term credit quality than the Missouri Public Service Commission (MPSC), because Kansas provides a higher use of expense tracking mechanisms and the ability to file abbreviated rate cases for significant capital expenditures.
“Moody’s also sees the benefit of Westar bringing an additional $1.2 billion of Federal Electric Regulatory Commission (FERC) regulated transmission rate base. “We view FERC as the most supportive regulatory jurisdiction in the US, due to forward looking, formula rates and relatively high allowed ROEs,” Moody’s said.
The acquisition debt will increase the percentage of parent holding company debt to total consolidated debt “from a negligible 2% to over 35% at the transaction closing,” which Moody’s thinks will take about 12 months.