NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Public Service Electric and Gas Company's (PSE&G) $500 million issuance of Series I secured medium term notes (MTNs) consisting of $250 million 1.8% secured MTNs due June 1, 2019 and $250 million 4.0% secured MTNs due June 1, 2044. The settlement date is June 2, 2014. The Series I secured MTNs rank pari passu with PSE&G's other secured debt.
The Rating Outlook is Stable.
Proceeds from the issuance will be used for general corporate purposes including capital expenditures.
KEY RATING DRIVERS
--Sound financial profile;
--Constructive regulatory environment;
--Large capex program;
--General Rate Case (GRC) filing no later than November 2017.
Sound Financial Profile
Credit metrics are robust within the current rating ratings level. PSE&G continues to achieve strong profitability under its authorized return on equity (ROE) of 10.3% which produces strong coverage measures. Fitch expects consistent and stable performance through the filing of the next GRC now expected by November 2017.
Over this time period, Fitch models produce EBITDAR-to-Interest averaging between 6.5x and 7.0x and FFO fixed-charge coverage to average between 5.4x and 5.7x, both measures consistent with actual 2013 results of 6.86x and 5.58x, respectively. Fitch does not expect the additional capital investments under the recently approved Energy Strong Program to alter the financial profile or performance.
Growth Capital Spending
PSE&G is in the midst of a large capital spending program that is largely centered on transmission projects and the $1.2 billion Energy Strong Program, a capital investment program to harden the system from weather damage. PSE&G receives timely recovery of costs and invested capital in transmission projects.
PSE&G receives an authorized ROE of up to 11.68% on Federal Regulatory Energy Commission (FERC) regulated transmission projects while the Energy Strong Program is at a 9.75% authorized ROE level.
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 or 2013 and Fitch expects the authorized equity base at 51.2% of total capital to be maintained.
Constructive Regulatory Environment
PSE&G operates in a balanced regulatory environment, with oversight from the New Jersey Board of Public Utilities (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.
General Rate Case Filing By November 2017
PSE&G is required to file a GRC by November 2017 as a condition of the BPU's approval of the Energy Strong Capital Investment Program. New investments under the Energy Strong Program earn an authorized ROE of 9.75% on the first $1 billion of investment, moderately below PSE&G's current authorized ROE of 10.3% but comparable to recent authorized ROE outcomes. PSE&G will seek recovery of its investment above $1 billion at its next GRC filing.
Positive or negative rating actions for PSE&G appear unlikely at this time. However, downward rating pressure could result from:
--Change in New Jersey Regulations: Unfavorable changes in current New Jersey regulatory policies for timely recovery of utility capital investments, purchased power costs, or other operating costs could adversely affect PSE&G's ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
'Corporate Rating Methodology Including Short-Term ratings and Parent and Subsidiary Linkage', May 28, 2014;
'Recovery Ratings and Notching Criteria For Utilities', Nov. 13, 2013
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage