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 J secured medium-term notes (MTNs) consisting of $250 million 2.0% MTNs due Aug. 15, 2019 and $250 million 3.15% MTNs due Aug. 15, 2024. The settlement date is Aug. 12, 2014. The series J 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 series D and G secured MTNs on Aug. 15, 2014.
Key Rating Drivers
--Energy Strong Settlement;
--Robust credit metrics;
--A constructive regulatory environment in New Jersey;
--Large capex program.
Energy Strong Settlement
In May 2014, PSE&G reached an agreement with the New Jersey Board of Public Utilities (BPU) on its Energy Strong storm hardening infrastructure program. The initial five-year program has been downsized from the original $2.6 billion proposal to $1.2 billion. PSE&G can earn an authorized Return on Equity (ROE) of 9.75% on the first $1 billion of investment and can seek recovery of the remaining $220 million of investment through a General Rate Case (GRC) to be filed no later than Nov. 1, 2017.
PSE&G currently has an ROE of 10.3%, a level moderately above recently approved ROEs for the industry which average closer to 10%. The additional capital investment under the Energy Strong program is incrementally positive to Fitch's near-term forecasts. The timeline for the new GRC is beyond Fitch's three-year financial model.
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 through Fitch's 2016 forecast period. In Fitch models, PSE&G earns its 10.3% ROE, and recent 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 ROE, with timely recovery of capital deployed.
Credit metrics are expected to remain strong and PSE&G did not pay a dividend to its parent in 2013, allowing it to maintain its capital structure at its authorized 51.2% equity component during a period of heavy capex. Through 2016, Fitch expects EBITDAR-to-interest to average between 6.5x-7.0x, and debt-to-EBITDAR to approximate 3.0x, measures that compare favorably to industry peers.
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. Capex in 2013 totaled approximately $2.2 billion and Fitch models capex to average between $2 billion and $2.5 billion in the forecast period. PSE&G receives timely recovery of costs and has invested capital on transmission infrastructure investments and in some cases receives an authorized ROE of up to 11.68% on FERC-regulated projects. PSE&G also receives an accelerated recovery on Energy Strong investments.
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.
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;
--EBITDAR-to-interest coverage below 5.0x or debt-to-EBITDAR above 3.5x on a sustained basis could result in a downgrade.
Positive: A positive rating action is not considered likely during the large capex cycle.
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
'Rating U.S. Utilities, Power and Gas Companies - Sector Credit Factors', March 11, 2014
'Recovery Ratings And Notching Criteria For Utilities', November 19, 2013
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities