NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Public Service Electric and Gas Company's (PSE&G) $600 million issuance of Series I secured medium term notes (MTNs) consisting of $350 million 2.3% MTNs due Sept. 15, 2018 and $250 million 3.75% MTNs due March 15, 2024. The settlement date is Sept. 12, 2013. The Series I secured MTNs rank pari-passu to PSE&G's other secured debt. The Rating Outlook is Stable.
Proceeds from the issuance will be used for general corporate purposes including repayment of short term borrowings.
KEY RATING DRIVERS
--Robust credit metrics
--A constructive regulatory environment in New Jersey;
--Large capex program
ROBUST CREDIT METRICS
Fitch expects strong EBITDA growth from recently completed as well as new transmission projects currently under construction that will propel earnings and cash flow measures throughout Fitch's 2013-2015 forecast period. The New Jersey Board of Public Utilities (BPU) approved an authorized Return on Equity (ROE) of 10.3% in 2010 for both the electric and gas distribution segments and new PJM transmission investments that earn a Federal Energy Regulatory Commission (FERC) formula rate return will significantly diversify the utility's future cash flows. These transmission projects provide increased cash flow predictability at a strong return on equity, with timely recovery of capital deployed.
Fitch does not expect PSE&G will have the need to file another rate case over the 2013-2015 forecast period given the likelihood of the utility being able to continue to earn its authorized 10.3% return on equity. Over this time period, Fitch expect EBITDA to Interest to average over 7.0x and FFO to Debt to average over 22%. Both measures compare favorably to rating category peers.
GROWTH CAPITAL SPENDING
PSE&G is in the midst of a large capital spending program that is largely centered on transmission projects. PSE&G receives timely recovery of costs and invested capital on such transmission infrastructure investments and in some cases receives an authorized ROE of up to 11.68% on FERC regulated projects. Transmission investments are expected to average slightly above $1 billion per annum over the next three years.
Fitch expects PSE&G to maintain its capital structure during this period of elevated capex. PSE&G did not pay any dividends to its parent in 2012 Retained earnings and modest incremental debt issuances are expected to fund the capex budget and preserve the authorized equity base at 51.2% of total capital.
CONSTRUCTIVE REGULATORY ENVIRONMENT
PSE&G operates in a balanced regulatory environment, with oversight from the BPU. The BPU permits PSE&G to use several regulatory mechanisms to recover costs in a timely manner, and has also implemented a weather normalization clause at the natural gas utility. These regulatory mechanisms enhance the predictability of utility cash flows by mitigating the effect of exogenous factors.
HURRICANE SANDY COSTS AND SYSTEM HARDENING
PSE&G incurred approximately $40 million of expenses related to Hurricane Sandy in the fourth quarter of 2012. A regulatory asset of $242 million was recorded to reflect Sandy and other storm costs from which the utility can seek recovery as part of the next general rate case.
PSE&G has proposed a nearly $4 billion ten-year infrastructure investment in the aftermath of Hurricane Sandy. Any such investment would require BPU regulatory approvals and be subject to contemporaneous returns on such investment. Fitch has not included any such investment in its forecasts, although given the conservative capital structure of the utility and PSEG, the incremental investment could be financed within rating category leverage bands.
What Could Trigger A Rating Action
Negative: A negative rating action could occur if PSE&G failed to maintain its existing capital structure or earn an adequate return on investment during this period of elevated capex. EBITDA to interest coverage below 5.5x could result in a downgrade.
Positive: A positive rating action is not considered likely at this time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology'(Aug. 5, 2013);
--'Recovery Ratings And Notching Criteria For Utilities' (Nov. 12, 2012);
--'2013 Outlook: Utilities, Power and Gas'(Dec. 7, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Recovery Ratings and Notching Criteria for Utilities
2013 Outlook: Utilities, Power, and Gas