Fitch Rates WEC Energy Group's Sr. Notes 'BBB+'
(The following statement was released by the rating agency)Fitch Ratings-New York-16 March 2021:
Fitch Ratings has assigned a 'BBB+' rating to WEC Energy Group, Inc.'s (WEC) senior notes. The senior notes are unsecured obligations of the company ranking equally with WEC's other unsecured and unsubordinated debt. Proceeds from the debt issuance will be used for general corporate purposes and to repay the $340 million term loan entered into by the company March 30, 2020. WEC's Issuer Default Rating (IDR) is 'BBB+'/Stable.
Key Rating Drivers
Regulatory Diversification: WEC's credit profile benefits from ownership of several utilities operating under balanced regulatory regimes in Wisconsin, Illinois, Michigan, Minnesota and the Federal Energy Regulatory Commission (FERC). Wisconsin represents approximately 65% of WEC's consolidated asset base, with FERC and Illinois contributing 14% and 16%, respectively. Michigan and Minnesota combined, represent 5% of consolidated rate base.
Supportive Rate Regulation: Fitch believes Wisconsin rate regulation generally supports utility credit quality. Constructive regulatory mechanisms include forward-looking test years, annual fuel adjustments, pre-approval of large projects, competitive authorized ROEs and a healthy measure of equity in utility capital structures. Gas utilities in Illinois also benefit from favorable tariff mechanisms, including purchased gas adjustment, forward-looking test years, revenue decoupling and riders for bad debt expense and recovery of gas pipeline replacement costs in Chicago outside of general rate case proceedings.
FERC regulation provides timely recovery of invested capital and relatively attractive authorized ROEs and price regulation in MI and MN is credit supportive.
Coronavirus Pandemic Impact: The pandemic's impact on WEC's FY20 electricity sales were relatively benign, reflecting weather-driven demand, a resilient local economy and increased residential demand from stay-at-home orders. FY20 retail electric sales deliveries on a weather normalized basis were better than management expectations, with total normalized sales (ex-mine) declining 2.9% versus management's projected decline of 4.6%.
Focus on Clean Energy: In July 2020, WEC announced a new 70% emission reduction goal from 2005 levels by 2030, having surpassed its previous 40% goal in 2019, and is targeting a 30% decrease in methane emissions per mile in its gas distribution business by 2030 from a 2011 base line. WEC plans to retire older, fossil-fueled generation and replace it with renewables, battery storage and efficient natural gas-fired generation.
Elevated Capex: WEC plans to invest approximately $16.1 billion during 2021-2025 on a consolidated basis, a $1.1 billion (7%) increase from its 2020-2024 capex plan. WEC's capex program focuses on carbon reduction and enhanced efficiency and reliability. Of the $16.1 billion of projected capital spending, approximately 64% is allocated to renewables and grid and fleet reliability; 17% for technology upgrades/grid and fleet modernization; and 19% for gas distribution/electric generation, transmission and distribution.
WEC operating utility subsidiaries, Wisconsin Electric Power Co. (WE, A/Stable) and Wisconsin Gas LLC (WG, A/Stable), are investing in two liquid natural gas facilities to address the need for additional natural gas supply in Wisconsin. If approved by the Public Service Commission of Wisconsin (PSC), construction is expected to begin 4Q21 with an expected in-service date in late 2023 at a cost of approximately $370 million.
Non-Utility Renewables Investment: WEC through its non-utility subsidiary WEC Infrastructure LLC (WECI), has invested $1.2 billion and holds ownership interests in operating wind projects with total generating capacity of 834MW in Illinois, Nebraska and South Dakota. An additional $381 million is expected to be invested in the 300MW Thunderhead wind project. During 2021-2025, management plans to invest $1.8 billion in renewable generation in total and targeting a ceiling of no more than a 10% contribution to total earnings from WECI.
Tax Reform/Capex Pressure Metrics: Tax reform and high capex are expected to moderately pressure consolidated credit metrics over the forecast period, leaving little headroom to absorb unanticipated, untoward developments. Consolidated FFO-adjusted leverage for WEC will likely weaken to approximately 5.1x in 2020 from 4.7x in 2019, driven by the return of tax benefits to customers from federal tax reform legislation enacted in 2017, among other things, before improving to 4.8x in 2021 and will remain below our 5.0x downgrade sensitivity through 2022.
Sound financial performance at the utilities, efficient execution of its large capex program and sustained cost savings, including O&M savings from recent and projected coal plant retirements, will be critical to sustaining WEC's current 'BBB+'/Stable credit profile.
Relatively High Parent Leverage: Fitch expects parent debt to sustain near current levels of 30% over the forecast period, with management targeting parent debt at 30% or less of consolidated debt prospectively. External funding is expected to be required to refinance maturing debt, fund infrastructure investments and provide financial support to the utilities to maintain their regulatory capital. Stronger than expected deleveraging efforts, while not currently anticipated by Fitch, would enhance WEC's consolidated credit profile.
Parent-Subsidiary Linkage: Fitch believes rating linkage between WEC and each of its regulated utility subsidiaries is moderate. Fitch takes a bottom-up approach in assessing WEC's creditworthiness. WEC's credit profile is weaker than its operating utility subsidiaries' credit profiles. Moderate rating linkage reflects strong operational and strategic ties offset by prescribed regulatory capital structures. Fitch typically allows a maximum two-notch differential between the IDRs of WEC and its rated subsidiary long-term IDRs.
Fitch believes WEC's business risk profile is comparable to peer utility holding company Xcel Energy, Inc. (BBB+/Stable) and moderately stronger than DTE Energy, Co. (BBB/Stable). Both WEC and Xcel enjoy regulatory diversity from ownership of multi-state regulated utilities that operate in generally supportive regulatory environments.
Xcel is more diverse in comparison to WEC, providing electric and gas utility service in parts of eight Midwestern and Western states, while WEC provides electric and gas utility service in parts of four Midwestern states. All three utilities have significant coal-fired generation exposure and are executing strategies designed to reduce reliance on coal while increasing cleaner, low emitting resources.
Fitch believes DTE Energy's business profile is somewhat weaker than WEC and Xcel, reflecting less diversity in its core utility operations. Unlike WEC and Xcel's multi-state operating profiles, DTE provides electric and natural gas utility services solely in Michigan. Fitch estimates FFO leverage will approximate 5x or better for WEC and Xcel Energy post-2020 and 5.0x-5.1x in 2022 and 2023 at DTE Energy.
Fitch's Key Assumptions Within Its Rating Case for the Issuer
-- PSC approved rate increases effective Jan. 1, 2020.
-- QIP rider increases at Peoples Gas through 2023.
--Tax reform adjustments under commission orders including amortization of unprotected tax benefits through 2021 as authorized in the Wisconsin commission's written order in WE's, WG's and WPS's last general rate case.
--Wind acquisitions funded with debt and internal cash flow.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-- Given high capex and near-term financial pressure from tax reform, positive rating actions are unlikely in the near term.
-- Improvement in FFO leverage to 4.0x or better could lead to future credit rating upgrades.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-- A more aggressive financial management policy and resulting higher leverage.
-- Meaningful, sustained deterioration in price regulation across its operating utilities' jurisdictional service territory.
-- FFO leverage greater than 5.0x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
WEC had approximately $24.8 million of consolidated cash and cash equivalents and approximately $1.3 billion of unused borrowing capacity under committed credit agreements as of Dec. 31, 2020. Approximately $1.4 billion of consolidated CP borrowings plus $2.3 million of LOCs backed by the company's bank facilities were outstanding at year-end 2020. WEC's committed credit facility allows it to borrow up to $1.2 billion; WE, $500 million; WPS, $400 million; WG, $350 million; and PGL, $350 million. All credit facilities mature Oct. 6, 2022.
Smaller entities within the WEC corporate family -- North Shore Gas Company (NSG), Michigan Gas Utilities (MGU), Minnesota Energy Resources and Upper Michigan Energy Resources Corp. (UMERC) -- meet their short-term liquidity needs through intercompany borrowings with the parent company. NSG can borrow up to $50 million from Integrys and up to $50 million from sister affiliate PGL. Similarly, PGL is able to borrow up to $150 million from Integrys and up to $50 million from NSG.
Date of Relevant Committee 15 January 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
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WEC Energy Group, Inc.
----senior unsecured; Long Term Rating; New Rating; BBB+
Primary Rating Analyst
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Fitch Ratings, Inc.
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Shalini Mahajan, CFA
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