NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Public Service Electric and Gas Company's (PSE&G) $250 million 3.05% issuance of Series J Secured Medium-Term Notes (MTNs) due Nov. 15, 2024. The settlement date is Nov. 7, 2014. The Series J secured MTNs rank pari-passu to PSE&G's other secured debt. The rating Outlook is Stable.
KEY RATING DRIVERS
--Large capex program
--Energy Strong Program
--Robust credit metrics
--Financial flexibility during a period of high capex
Fitch expects PSE&G's large ongoing capex and infrastructure investment program to propel earnings and cash flows over the 2014 to 2016 forecast period. PSE&G's management expects capex to exceed $2 billion annually in 2014 and 2015.
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 of return add diversity to the utility's cash flows and are a key driver of future earnings growth. PSE&G receives an authorized ROE of up to 12.93% on select transmission investments.
In May 2014 PSE&G reached an agreement with the 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.
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.
Credit metrics are expected to remain strong and PSE&G did not pay a dividend to its parent in 2012 or 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 to 7.0x and Debt to EBITDAR to approximate 3.0x, measures that compare favorably to industry peers. PSEG's parent, Public Service Enterprise Group's (rated 'BBB+' with a Stable Outlook by Fitch) strong financial condition and conservative capitalization, affords PSE%G considerable flexibility in managing its own capital structure during a period of high capex.
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, including capex, 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.
Factors that individually or collectively result in a rating downgrade or Negative Rating Outlook include:
--A change in regulatory policies that prohibit PSE&G's ability to earn a timely and adequate return on invested capital;
--Debt to EBITDAR maintained above 3.5x (3.1x at Dec. 31, 2013)
Factors that individually or collectively result in a rating upgrade or Positive Rating Outlook
--A positive rating action is not considered likely during the period of high capex. FFO Adjusted Leverage sustained below 3.5x could lead to a favorable rating action.
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'(Nov. 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