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Global Credit Research - 16 Nov 2010
New York, November 16, 2010 -- Moody's Investors Service today downgraded the long-term
ratings of Wisconsin Electric Power (WEPCO), Wisconsin Gas,
LLC (Wisconsin Gas) and Elm Road Generating Station Supercritical,
LLC (ERGSS) to A2 from A1. These rating actions conclude the review
for possible downgrade that commenced on October 29, 2010.
The rating outlooks for WEPCO, Wisconsin Gas and ERGSS are stable.
The downgrade of the long-term ratings for WEPCO, Wisconsin
Gas and ERGSS was triggered by a reevaluation of our notching for this
issuer family coupled with an expectation for a modest reduction in their
respective financial metrics.
WEPCO and Wisconsin Gas have historically been rated two notches higher
than their parent, Wisconsin Energy Corporation (WEC: A3,
stable), due in part to the considerable amount of holding company
debt within the corporate structure. WEC, however,
has successfully rebalanced the family's debt structure by issuing
debt at various operating subsidiaries and using proceeds to repay its
holding company debt.
WEC's holding company debt still remained significant at September
30, 2010, accounting for approximately 30% of consolidated
balance sheet debt; however, the repayment in the near-term
of a maturing holding company note is expected to cause its debt to decline
to a point where a two notch rating difference between WEC and its operating
subsidiaries is no longer justified.
The downgrades also took into consideration a modest anticipated reduction
in WEPCO and Wisconsin Gas' financial metrics. In the case
of WEPCO, increased debt balances needed to fund planned capital
expenditures are expected to cause the company's ratio of cash from operations
prior to changes in working capital (CFO pre-W/C) to debt and interest
coverage to trend downward to slightly more than 20% and 5.5
times annually through 2012. These ratios currently stand at approximately
26% and 6.5 times, respectively. A similar
trend is expected for Wisconsin Gas. Despite these expected weaker
metrics, WEPCO and Wisconsin Gas are well positioned in the A2 senior
unsecured rating category due in large part to a supportive regulatory
environment that provides for excellent cash flow visibility and timely
cost recovery opportunities.
ERGSS owns an 83.34% undivided ownership interest in Unit
1 of the Elm Road Generating Station that it leases to WEPCO pursuant
to a Facility Lease with a 30-year base term. Given that
lease payments are the sole source of cash flow to service ERGSS' senior
notes, its rating reflects in large part the credit profile of WEPCO.
Following these downgrades, the rating outlooks for WEPCO,
Wisconsin Gas and ERGSS are stable. Over the long-term,
positive rating pressure could result from a significant improvement in
financial metrics such that the ratio of CFO pre-W/C to debt exceeds
27% on a sustainable basis. Conversely, factors that
could create negative pressure include a less supportive regulatory environment,
an increase in WEC's business risk profile or if the companies suffer
a decline in financial metrics such that the ratio of CFO pre-WC
to debt falls below 18% for an extended period.
- Senior unsecured rating to A2 from A1
- Preferred stock rating to Baa1 from A3
- Senior unsecured rating to A2 from A1
Elm Road Generation Station
- Senior unsecured rating to A2 from A1
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in August 2009.
WEC is a utility holding company based in Milwaukee, Wisconsin.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades the long-term ratings of Wisconsin Electric Power Company and Wisconsin Gas
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