Fitch Rates Westar Energy's $300MM FMBs Due 2042 'A-'; Outlook Stable

Fitch rates Westar Energy, Inc.'s (Westar) $300 million issuance of additional first mortgage bonds (FMBs) 'A-'. The 4.125%, 30-year FMBs rank pari passu with Westar's and affiliate Kansas Gas and Electric Company's (KGE) other secured debt and mature March 1, 2042.

The Rating Outlook is Stable.

Proceeds from the issuance would be used to provide long-term funds to finance the ongoing capital program, retire the $150 million 6.10% FMBs series due 2047, and to repay short-term debt under the commercial paper program.

The issuance is expected to close May 17, 2012.

Westar's ratings incorporate the following key factors:

--A generally constructive regulatory environment in Kansas that has improved in recent years;

--Management's focus on core utility operations and transmission projects;

--A moderately large capital spending program that includes a significant amount of required environmental upgrades at the utilities' coal-fired power plants.

Rate Case Activity:

Westar and KGE's latest general rate case (GRC) was settled earlier this year, with a modest rate increase having taken effect May 1. The utilities are likely to file an abbreviated rate case in mid-April 2013 to start recovering some of the environmental control costs at the La Cygne Generating Station. The remaining costs associated with that multi-year project would not be recoverable until the utilities' next GRC, as per the Kansas Corporation Commission's (KCC) earlier ruling. The increased amount of regulatory lag associated with the La Cygne project, along with the increased environmental control spending mandated by the U.S. Environmental Protection Agency, will temporarily pressure the financial profile before these projects go into rate base.

Fitch expects the utilities to receive reasonable recovery from the KCC in future rate cases to help maintain supportive credit metrics. The low rates currently charged to customers of Westar and KGE, along with a Kansas economy that is faring better than that in most other states, should mitigate impediments to continued balanced rate case outcomes from the KCC.

Cost Recovery Mechanisms:

The KCC and the Federal Energy Regulatory Commission (FERC) allow Westar and KGE to use cost-recovery mechanisms for certain expenditures, which decreases regulatory lag and provides stability to the financial profile. Of particular importance are the environmental cost recovery rider (ECRR) and the FERC-approved transmission formula rate, each of which is expected to cover more than 20% of consolidated capex through 2013.

The KCC previously ruled against the ECRR being used for environmental capex over the next few years at the La Cygne Generating Station, due to it being jointly-owned by and solely operated by Kansas City Power & Light, a subsidiary of Great Plains Energy Inc. (not rated by Fitch). However, Fitch expects full recovery to be likely through the aforementioned planned abbreviated rate case filing and the utilities' next GRC filing.

Other cost recovery mechanisms authorized by the KCC include a retail energy cost adjustment mechanism and a pension and other post-employment benefits expense tracker.

Focus on Utility Operations:

Management remains focused on Westar and KGE's core utility operations and has taken efforts to strengthen the balance sheet. Generation, transmission, and environmental projects have been funded with a balanced mix of debt and equity, and the company's capital expenditure budget has been structured prudently and spread out over many years so as to mitigate the impact on financial performance.

Fitch expects Westar's consolidated financial metrics to remain adequate, supported by constructive regulatory cost recovery mechanisms and a stable operating environment. Fitch anticipates Westar's EBITDA interest coverage to average greater than 4.0 times (x) through 2014, although funds from operations (FFO) to debt is expected to be temporarily depressed at around 15% - 16% due to increased debt balances associated with environmental and transmission projects.

Ample Liquidity:

Westar and KGE have a solid liquidity position, and Westar's new commercial paper program should enable the utilities to access the short-term debt markets at attractive rates. The commercial paper is supported by a $730 million revolving credit facility that matures on Sept. 29, 2016 and a $270 million revolving credit facility that matures on Feb. 18, 2015.

Subject to lender participation, each of these revolving credit facilities can be extended up to two years and has an accordion feature that would allow for up to $400 million in aggregate of additional borrowing capacity. Ample availability under these facilities, along with the utilities' history of being able to access public equity and debt even during turbulent markets, should give Westar and KGE sufficient financial flexibility in carrying out their construction projects.

Rating Linkage Between Westar and KGE:

The credit ratings for Westar and KGE are the same, reflecting centralized operations and treasury functions and a consolidated capital structure used for ratemaking. Westar and KGE conduct business under the Westar Energy brand name and have functionally integrated utility operations. KGE relies on Westar for its short-term cash needs, and Westar's revolving credit facilities are collateralized by KGE's first mortgage bond indenture. Furthermore, no regulatory or corporate structures exist to restrict the migration of cash between the two entities.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011);

--'Recovery Ratings and Notching Criteria for Utilities' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677735

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