Fitch Ratings has assigned an 'A' rating to PECO Energy Co.'s (PECO) new
$350 million issue of 10-year first-mortgage and refunding-mortgage
bonds. Proceeds will be used for general corporate purposes. The Rating
Outlook is Stable.
KEY RATING DRIVERS
Strong Credit Profile: Fitch expects PECO's credit measures to remain
strong relative to both Fitch's target ratios for the current rating
level and the company's' peer group of 'BBB+' rated distribution
utilities. Over the next few years Fitch estimates debt/EBITDAR and
FFO-adjusted leverage to approximate 3.2x and 3.7x, respectively.
Manageable Capital Spending: Forecast capex of approximately $1.6
billion over the next three years is relatively unchanged from the prior
three-year period. However, unlike the prior period, PECO no longer has
a large cash balance to help fund the expenditures and will be more
reliant on external funding.
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 electric
and gas supply costs from customers through monthly fuel adjustment
mechanisms. The new regulatory paradigm in Pennsylvania also reduces
Alternative Regulatory Model: Fitch considers the regulatory legislation
enacted in Pennsylvania in February 2012 (HB 1294) to be supportive of
credit quality. The law allows the Pennsylvania Public Utility
Commission (PUC) to establish a distribution system investment charge
(DSIC) to provide timely recovery of capital costs incurred to enhance
electric and gas distribution systems. The DSIC will be updated
quarterly. The PUC approved a DSIC for PECO's natural gas delivery
business in September 2015. However, the company did not request an
initial revenue requirement associated with the DSIC. The new
legislation also allows traditional rate filings to include fully
forecasted test years, further reducing regulatory lag.
Pending Rate Case: The parties to PECO's pending rate case filed a
settlement agreement with the PUC in September 2015 that if approved
should bolster credit metrics beginning in 2016. The settlement provides
for a $127 million rate increase or about two-thirds of PECO's $190.1
million rate request. The settlement agreement also includes
implementation of a DSIC for the company's electric operations, but not
until eligible investments exceed the Dec. 31, 2016 levels projected by
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 initial consumption reduction
targets of 1% by 2011 and 3% 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 (See Act 129 below). Importantly,
Act 129 provides a surcharge mechanism to recover the implementation
costs (other than lost sales) on a timely basis.
[Positive Rating Action: Positive rating action is not likely prior to
the resolution of the Negative Rating Watch of its corporate parent
Exelon Corp., which is driven by the pending merger with Pepco Holdings.
Inc. and the challenging operating environment of its merchant
Negative Rating Action: An increase in parent company leverage or risk
profile could adversely affect ratings. However, given that PECO's
credit profile is strong within its rating level, it likely could
withstand a one-notch parent downgrade.]
--Constructive resolution of pending rate case
--Capital structure with approximately 53% equity
--Electric sales growth of about 0.5% annually
--Capex of $1.6 billion over the 2015-2017 time period
A $600 million committed credit facility provides ample liquidity. The
credit facility supports a commercial paper program of equal size and
also provides for direct borrowings. The credit facility extends to May
2019 and allows for a one-year extension. PECO also participates in a
corporate money pool along with its affiliates Exelon Generation
Company, LLC and Exelon Business Services Co., LLC. Parent Exelon Corp.
can lend to, but not borrow from, the money pool. At June 30, 2015, PECO
had no short-term borrowings and available cash of $26 million.
Date of Relevant Rating Committee: April 28, 2015
Additional information is available on www.fitchratings.com
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