CHICAGO--(BUSINESS WIRE)--The PSEG Power LLC (Power; IDR 'BBB+', Outlook Stable) and its parent Public Service Enterprise Group Inc. (PEG; IDR 'BBB+', Outlook Stable) ratings will not be affected by the company's investment of up to $875 million in a merchant power plant in Maryland, according to Fitch Ratings. The Rating Outlook is Stable.
Fitch views the credit risk of Power's investment in the Keys Energy Center to be modest. Power purchased the development rights from Genesis Power LLC (not rated) and plans to develop the project over the next three years for a total investment of $825 million-$875 million. Power intends to finance the purchase and construction with cash and incremental debt. While the debt-financing will modestly weaken Power's financial profile, Fitch expects Power's credit metrics to remain well positioned for its 'BBB+' ratings over the rating horizon.
The Keys Energy Center is a 755-MW combined-cycle power plant in Maryland targeted to be completed in 2018. The planned merchant plant is located in a constrained section of the PJM Regional Transmission Organization (PJM) and offers some geographical diversification to Power's existing fleet. Power will be exposed to the usual technological, environmental and regulatory risks associated with a green field power plant during the construction phase. The modern technology, access to natural gas pipelines and proximity to transmission lines should support a favourable competitive position on the dispatch curve.
Following solid operating performance in recent quarters, Power's last 12 months (LTM) adjusted debt to EBITDAR and funds from operations (FFO) adjusted debt were 1.4x and 1.7x, respectively, at March 31, 2015. Assuming annual EBITDAR of $1.2 billion, Fitch forecasts adjusted debt to EBITDAR to weaken to about 2.7x during the construction period, consistent with Fitch's threshold of 2.75x for Power's current ratings. Furthermore, Power and PEG have ample liquidity, in Fitch's opinion, with combined $670 million of cash on hand as well as nearly full availability under their revolving credit facilities - $2.7 billion and $1 billion, respectively- at March 31, 2015.
Power's exposure to weak power prices and price volatility remain key credit concerns, in Fitch's view, although the hedging strategy and conservative capital structure reduce some of the risks associated with the merchant power market. In addition, PJM's capacity performance order could provide some upside potential to Power's profitability given the reliable performance and relative size of its nuclear assets.
Additional information is available on www.fitchratings.com.