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Rating Action:

Moody's affirms ratings of Evergy and subsidiaries; stable outlooks

12 Jun 2018

Approximately $9 billion of debt securities affected

New York, June 12, 2018 -- Moody's Investors Service ("Moody's") affirmed the ratings of Evergy, Inc. (Evergy, Baa2, formerly Great Plains Energy), Westar Energy, Inc. (Westar, Baa1), Kansas Gas and Electric Company (KGE, Baa1), Kansas City Power & Light Company (KCP&L, Baa1), and KCP&L Greater Missouri Operations Company (GMO, Baa2). The rating outlooks are stable.

Outlook Actions:

..Issuer: Evergy, Inc.

....Outlook, Remains Stable

..Issuer: Kansas City Power & Light Company

....Outlook, Remains Stable

..Issuer: Kansas Gas and Electric Company

....Outlook, Remains Stable

..Issuer: KCP&L Greater Missouri Operations Company

....Outlook, Remains Stable

..Issuer: Westar Energy, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Burlington (City of) KS

....Senior Secured Revenue Bonds, Affirmed A2

....Underlying Senior Secured Revenue Bonds, Affirmed A2

....Senior Unsecured Revenue Bonds, Affirmed Baa1

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa1

..Issuer: Evergy, Inc.

....Senior Unsecured Regular Bonds/Debentures, Affirmed Baa2

..Issuer: Kansas City Power & Light Company

.... Issuer Rating, Affirmed Baa1

....Senior Secured Shelf, Affirmed (P)A2

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Secured First Mortgage Bonds, Affirmed A2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bonds/Debentures, Affirmed Baa1

..Issuer: Kansas Gas and Electric Company

.... Issuer Rating, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed A2

....Underlying Senior Secured First Mortgage Bonds, Affirmed A2

..Issuer: KCP&L Greater Missouri Operations Company

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: La Cygne (City of) KS

....Senior Secured Revenue Bonds, Affirmed A2

....Underlying Senior Secured Revenue Bonds, Affirmed A2

..Issuer: Missouri Environ. Imp. & Energy Res. Auth

....Senior Unsecured Revenue Bonds, Affirmed Baa1

..Issuer: Wamego (City of) KS

....Senior Secured Revenue Bonds, Affirmed A2

....Underlying Senior Secured Revenue Bonds, Affirmed A2

..Issuer: Westar Energy, Inc.

.... Issuer Rating, Affirmed Baa1

....Senior Secured Shelf, Affirmed (P)A2

....Senior Secured Bank Credit Facilities, Affirmed A2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Secured First Mortgage Bonds/Notes, Affirmed A2

RATINGS RATIONALE

"Evergy's credit reflects the stronger financial profile of the combined company compared to Great Plains and Westar standalone, as well as our expectation that the family will benefit from improved economies of scale and the elimination of duplicate functions across the organization," said Robert Petrosino, Vice President -- Senior Analyst. "This will provide for meaningful cost reductions allowing for headroom in rates for the capital spending necessary to transition its generation fleet and modernize its grid."

Today's rating action assesses the new Evergy corporate family, which was formed on 4 June 2018, concluding a two year effort to combine Great Plains and Westar. The initially proposed transaction was denied by the Kansas Corporation Commission (KCC) due to their primary concerns of the financial condition of the merged entities based on the magnitude of the merger premium to be paid and the amount of debt Great Plains proposed to incur.

Great Plains and Westar negotiated a new merger agreement dated 9 July 2017, announcing a revised Merger of Equals (MOE) structured as a tax-free exchange of stock and consummated it last week through the new holding company, Evergy. On a pro forma basis, Evergy has an enterprise value of over $20 billion and is owned approximately 52.5% by Westar shareholders and 47.5% by Great Plains shareholders. In addition, the combined family has a rate base of over $13 billion and serves over 1.6 million customers across Kansas and Missouri.

The affirmation of Evergy's ratings considers the merger benefits including economies of scale, the company's financial policies, as well as the regulatory construct in Kansas and Missouri. Significant cost savings are projected from the merger through the elimination of duplicate functions, consolidating joint ownership of assets and avoidance of capital spend, all of which are expected to benefit stakeholders. The prospect of achieving cost savings is high, allowing for the company to provide upfront bill credits to customers and total guaranteed bill credits of $105 million through 2022, $75 million and $29 million to Kansas and Missouri customers, respectively.

Evergy will undergo a 60 million share repurchase plan over the next two years. While Great Plains issued $1.6 billion of common equity in October 2016 to fund the initially proposed acquisition of Westar, the current buyback plan approximates $3.1 billion. The $1.25billion of cash that remains on balance sheet from the October 2016 stock issuance will fund the initial equity buyback.

Moody's expects Evergy to issue new debt along with dividends from subsidiaries to fund the remainder of its buyback program in 2019 and 2020. This recapitalization will increase Evergy's debt-to-capitalization from 45% in 2018 to 54% in 2020, a credit negative. Nevertheless, Evergy's holding company level debt as a percentage of total consolidated debt is expected to be less than 20%, relatively modest compared to some peer utility holding companies. Moreover, with the increasing cash flow following the merger, Moody's also expects Evergy's key credit measure of cash flow before changes in working capital (CFO pre-WC) to debt to be in the mid-teens range and in-line with its Baa2 rating.

The affirmation of utility subsidiaries Westar, KCP&L, and GMO's ratings with a stable outlook considers the consistent cash flow generation that we expect from these subsidiaries on a pro forma basis as well as the relatively credit supportive regulatory construct in Kansas and Missouri. While Evergy will look to capitalize its operating companies in the low 50% debt-to-capitalization range through dividends and capital contributions, Moody's expects that financial measures at these will remain in-line with historical results. Specifically the key credit measure of CFO pre-WC to debt for Westar and KCP&L will be in the high-teens range, which is commensurate with the Baa1 rating at both utilities, while GMO will be slightly lower in most years and more reflective of a Baa2 rating. The recently passed Missouri Senate Bill 564 is expected to provide a more supportive regulatory framework, thereby reducing regulatory lag and the possibility of greater spend in Missouri.

Factors That Could Lead to an Upgrade

A rating upgrade could be considered for Evergy if the credit ratings of its operating companies are upgraded, if there is a sustained improvement in consolidated key credit metrics, including CFO pre-WC to debt in the low 20% range, and if holding company debt remains below 20% of total consolidated debt.

A rating upgrade could be considered for Westar and KGE if there are credit positive improvements in the regulatory framework in Kansas that result in higher returns and/or a greater ability to earn its allowed returns. Also, if Westar and KG&E demonstrate a sustainable improvement in credit metrics including CFO pre-WC to debt above 22% on a sustained basis, an upgrade could be considered.

A rating upgrade could be considered for KCP&L or GMO if there are continued positive improvements in the regulatory framework in Missouri whereby the Missouri Public Service Commission implements credit enhancing elements of Missouri Senate Bill 564 which was signed into law this month. The law should result in reduced regulatory lag and possible incremental capital spend and rate base growth directed toward grid modernization. If KCP&L or GMO demonstrate a sustainable improvement in credit metrics including CFO pre-WC to debt above 22% for KCP&L or above 19% for GMO on a sustained basis, an upgrade could be considered.

Factors That Could Lead to a Downgrade

A rating downgrade could be considered for Evergy if the credit ratings of its operating companies are downgraded or if there is a deterioration in consolidated key credit metrics such as CFO pre-WC to debt falling below 15% on a sustained basis. In addition, Evergy could be downgraded if holding company debt was to increase above 20% of a consolidated debt on a sustained basis a downgrade could be considered.

A rating downgrade could be considered for Westar and KGE if the regulatory environment in Kansas deteriorates meaningfully, creating a more contentious environment, increasing regulatory lag or lowering returns well below peer averages. Also, if Westar or KGE's key credit metrics, such as CFO pre-WC to debt falls below 19%, on a sustained basis, a downgrade could be considered. A downgrade could be considered for KCP&L or GMO if the regulatory environment in Missouri deteriorates meaningfully, creating a more contentious environment, increasing regulatory lag or lowering returns well below peer averages. Also, if KCP&L or GMO's key credit metrics, such as CFO pre-WC to debt falls below 19% for KCP&L or 16% for GMO, on a sustained basis, a downgrade could be considered.

Evergy Inc. (Evergy, Baa2 stable) is a utility holding company with operations in Kansas and Missouri through Westar Energy (Westar, Baa1 stable), Kansas Gas & Electric Company (KGE, Baa1 stable) Kansas City Power & Light Company (KCP&L, Baa1 stable) and KCP&L Greater Missouri Operations Company (GMO, Baa2 stable).

Transource Energy LLC (Transource, A2 stable) is a joint-venture transmission company that Evergy owns 13.5%, with the reminder held by American Electric Power Company, Inc. (AEP, Baa1 stable).

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Robert Petrosino
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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