NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to PECO Energy Co.'s (PECO) proposed new $300 million offering of First and Refunding Mortgage Bonds maturing in 2044. The Rating Outlook is Stable. Net proceeds will be used to pay at maturity $250 million 5.0% first and refunding mortgage bonds due Oct. 1, 2014 and for general corporate purposes.
KEY RATING DRIVERS
Strong Credit Profile: Historical and projected credit measures are strong and well in excess of Fitch's target ratios for the current rating level and the companies' peer group of 'BBB+' distribution utilities. Over the next few years Fitch estimates EBITDA/interest and FFO/interest will average about 7.0x and 6.0x, respectively and FFO/Debt and debt/EBITDA about 20% and 3.0x.
Alternative Regulatory Model: Fitch considers the regulatory legislation enacted in Pennsylvania in February 2012 (Pennsylvania Act 11) to be supportive of credit quality. Act 11 allows the Pennsylvania Public Utilities Commission (PUC) to implement a distribution system investment charge (DSIC) to provide timely recovery of capital costs incurred to improve or replace aging electric and gas systems. Act 11 also allows utilities to use a fully forecasted test year to capture in rate base assets that will placed in service during the first year new rates are in effect. Prior to implementing a DSIC utilities must have a long-term infrastructure improvement plan (LTIP) approved by the PUC. The PUC approved PECO's DSIC plan in May 2013.
Manageable Capital Spending: PECO expects to invest approximately $1.6 billion over the next three years, moderately higher than the $1.4 billion expended in the prior three-years. The rise is primarily attributable to the installation of advanced meters and a smart grid. The expenditures equate to about 2.2x depreciation and amortization, which approximates the industry in average. Fitch expects 80% of the three-year capital budget to be funded with internal sources.
Low business Risk: Ratings and credit quality benefit from the absence of commodity price exposure and the associated cash flow volatility. PECO retains the provider of last resort obligation for customers that do not choose an alternative energy provider, but recovers its energy supply costs from customers through a monthly fuel adjustment mechanism. The new regulatory paradigm in Pennsylvania also reduces business risk.
Demand Reduction: Pennsylvania Act 129 (Act 129) requires Pennsylvania utilities to reduce electric consumption with the companies absorbing the associated revenue loss. PECO met the 3% consumption reduction target required by May 31, 2013. Act 129 also requires the installation of smart meter technology and the implementation of time of use rates and real time price plans. Importantly, Act 129 provides a surcharge mechanism to recover the implementation costs (other than lost sales) on a timely basis.
Positive: Positive rating action is not likely prior to the resolution of the Negative Rating Watch of its parent Exelon Corp., which is driven by the pending merger with Pepco Holdings, Inc. and the challenging operating environment of its non-regulated generation subsidiary.
Negative: An increase in parent company Exelon Corp.'s leverage or risk profile could adversely affect PECO's ratings. However, given that PECO's credit profile is strong within its rating category, it likely could withstand a one-notch parent downgrade.
Lack of rate support for utility infrastructure investments or a change in the commodity cost recovery mechanism in Pennsylvania could also adversely affect PECO'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. 19, 2013);
--'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
Recovery Ratings and Notching Criteria for Utilities
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)