Fitch Ratings assigns an 'A-' rating to Baltimore Gas and Electric Co.'s
(BGE) dual-tranche offering of senior notes including the $350 million
2.4% series due Aug. 15, 2026 and the $500 million 3.5% series due Aug.
15, 2046. The Rating Outlook is Stable. Net proceeds will be used to
repay the $300 million 5.9% series B notes due Oct. 1, 2016, to repay a
portion of outstanding commercial paper (CP) and for general corporate
purposes. As of Aug. 11, 2016, $324 million of CP was outstanding.
Key Rating Drivers
Strong Credit Metrics: BGE's credit metrics are
strong for the current rating level due in large measure to electric and
gas base rate increases effective December 2014, and a modest rise in
debt. Fitch expects credit metrics to weaken moderately in 2016 due to
an expanded capex budget, but to remain strong for the rating level,
including debt/EBITDAR and FFO lease-adjusted leverage of about 3.25x
and 3.50x, respectively.
Regulatory Recovery Mechanisms: Rate adjustment mechanisms outside of
base rate cases tend to stabilize BGE's cash flow. These include
decoupling for residential and commercial gas and electricity sales, and
purchased gas and purchased power recovery mechanisms. In 2014, Maryland
regulators approved a rider to recover gas infrastructure improvements
and have approved three subsequent surcharges (2014, 2015 and 2016).
Certain capex is also subject to tracking mechanisms, including energy
efficiency.
Rising Capex Plan: BGE expects to invest $4.6 billion over the next five
years primarily in electric and natural gas infrastructure and to a
lesser extent Federal Energy Regulatory Commission (FERC) regulated
transmission facilities. The investments will increase BGE's rate base
at a compound annual growth rate (CAGR) of about 7.4% annually, well
above the 4.6% CAGR over the last four years. Fitch expects the capex to
be funded with a balanced mix of debt and equity consistent with the
capital structure employed in the company's recent rate case.
Nonetheless, without timely cost recovery the large capex plan could
stress credit quality measures.
Restrictive Rate Decision: Fitch considers BGE's most recent rate order
issued in June 2016 to be somewhat restrictive. BGE was authorized
electric and gas base rate increases aggregating $89.6 million, or about
46% of the company's revised rate request. Major disallowances included
an extended recovery period for BGE's Advanced Metering Infrastructure
(AMI) investments. The Public Service Commission (PSC) ruled the
deferred balance should be collected over 10 years rather than the five
years requested by the company, and also disallowed recovery of certain
costs associated with legacy meters and a smart-meter opt-out program.
The recovery of increased costs associated with the use of Baltimore's
conduit system was also denied. The allowed return on equity (ROE) of
9.75% is slightly above the nationwide average, but lower than the 10.6%
ROE requested by BGE. The PSC also strayed from its normal practice of
using a utility's actual capital structure and instead adopted a 51.9%
common equity ratio compared to the actual common equity ratio of 53.7%.
Ring-Fencing: BGE has several measures in place to ring-fence the
utility from parent Exelon Corp. (EXC) and affiliates. These include
maintaining separate books and records, separate credit facilities and
CP programs and allocating parent expenses according to a Cost
Allocation Manual. Also, BGE does not participate in the EXC corporate
money pool, and BGE's financings do not contain any provisions that
could result in cross-defaults between BGE and EXC.
Rate Strategy: BGE has implemented a series of electric and gas base
rate increases since early 2013 that have materially strengthened its
credit profile. Fitch expects BGE to continue regular rate filings to
recover its planned infrastructure investments and to limit regulatory
lag.
Key Assumptions
--Relatively flat electric and gas load growth;
--Constructive rate
treatment of capital investments;
--Continuation of existing rate
recovery mechanisms;
--Five-year $4.6 billion capex plan to be
funded with a balanced mix of debt and equity.
Rating Sensitivities
[Positive: Positive rating actions may be considered if BGE is able to
maintain debt/EBITDAR and FFO lease-adjusted leverage comfortably below
3.4x and 4.0x, respectively.
Negative: Given the headroom in existing ratings, a downgrade is not
likely, but could occur if adjusted debt/EBITDAR and FFO lease-adjusted
leverage consistently exceed 3.7x and 4.8x, respectively.]
Liquidity
A $600 million committed credit facility provides ample
liquidity. The credit facility supports a CP program of equal size and
also provides for direct borrowings. The credit agreement extends to
March 2021 and allows for a one-year extension. Due to the ring-fencing
measures, BGE does not participate in the EXC corporate money pool.
Available cash at June 30, 2016 was $5 million.
Other than the $378 million maturing in 2016, which is expected by Fitch
to be refinanced, annual debt maturities over the next five years are
moderate.
Additional information is available at 'www.fitchratings.com'.
Date of Relevant Rating Committee: April 27, 2016
Disclosure: There was no financial statement adjustments made that were
material to the rating rationale outlined above.
Applicable Criteria
Corporate Rating Methodology - Including
Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010447
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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