NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Delmarva Power & light Co.'s (DPL) proposed new $200 million issue of first mortgage bonds due May 15, 2045. The Rating Outlook is Stable.
Proceeds of the offering will be used to repay $100 million of outstanding 5% notes maturing June 1, 2015 and the remainder to repay outstanding commercial paper and for general corporate purposes.
KEY RATING DRIVERS
Credit Metrics: After two years of improvement, leverage measures will likely weaken through 2016 as DPL avoids base rate filings while regulators review the pending merger of DPL's parent, PEPCO Holdings, Inc. (PHI), and Exelon Corp. (EXC). Fitch expects FFO-adjusted leverage and debt/EBITDAR to approximate 4.2x and 5.0x, respectively, in 2016 and improve to about 3.8x and 4.6x in 2018. FFO fixed-charge coverage is expected to decline to about 4.4x in 2016 and improve to about 5.0x in 2018.
Pending Exelon Merger: The pending merger between PHI and EXC has no direct effect on DPL's credit quality but does provide a stronger, better-capitalized parent with far greater financial flexibility. Moreover, Fitch anticipates DPL will benefit from improved operating efficiency and lower costs as a result of the merger. Nonetheless, rate case avoidance and a likely package of ratepayer benefits will adversely affect cash flow in the near term.
Rate Increases: Since September 2013, DPL has been authorized three tariff increases aggregating to $36.9 million. In Delaware, electric and natural gas rate hikes were implemented in April 2014 and October 2013, respectively, and in Maryland electric rates were increased in September 2013. Annual rate filings are part of management's strategy to soften the effect of rate lag. Due to the EXC merger review, however, rate filings have been deferred. There were no rate filings in 2014, and the next rate request is not likely before fourth-quarter 2015.
Significant Capital Program: DPL is in the midst of a significant capital program of approximately $1.7 billion over 2015-2019 that will require ongoing rate support. The expenditures are for distribution reliability, transmission and new customer connections.
Decoupling: In Maryland, which accounts for about 35% of retail sales, DPL operates with a Bill Stabilization Adjustment (BSA) that reduces volumetric exposure and stabilizes revenue. The BSA provides for a fixed distribution charge per customer rather than a charge based on usage. Any deviation from the approved charge is either recovered from or credited to customers, effectively decoupling revenue from sales.
Transmission Rate Challenge: State regulators in Delaware and neighboring states have challenged the Federal Energy Regulatory Commission's (FERC) transmission rates. The regulators want to reduce the FERC-authorized return on equity (ROE) to 8.7% based on a zone of reasonableness between 6.78% and 10.33%. In response to a similar challenge in New England, FERC established a new base ROE of 10.57%. DPL's current FERC-authorized ROE is 11.3%. Fitch calculates DPL's earnings at risk to be modest with a 1% change in the FERC-authorized ROE, equivalent to about $2 million after tax.
Merger Approval: EXC, PHI and the staff of the Delaware Public Service Commission (PSC) reached a settlement agreement in the pending merger in February 2015. The agreement, which is subject to PSC approval, includes $49 million of rate credits over 10 years. The merger is expected to close in the second or third quarter of 2015.
KEY ASSUMPTIONS
--Base distribution rates held at current level through mid-2016; annual rate filings thereafter;
--Annual customer growth of 0.5% and flat sales growth;
--O&M increases of 2.5% annually;
--Capex of $1.1 billion over the 2015 - 2017 periods;
--Capex funded in a manner to preserve existing capital structure.
RATING SENSITIVITIES
Positive Rating Action: A positive rating action is not likely during the rate case avoidance period, but could occur if debt/EBITDAR falls below 3.6x on a sustainable basis.
Negative Rating Action: Sustained lease-adjusted FFO leverage above 4.5x and/or FFO fixed-charge coverage below 4.7x could result in lower ratings. Inability to close the merger and/or lack of regulatory support for post-merger rate filings could also result in lower 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' (March 5, 2015);
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984088
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