2010-09-02 21:12:28 -
Fitch Ratings has affirmed the outstanding ratings for Potomac Electric Power Company (Pepco), Delmarva Power & Light (DPL) and Atlantic City Electric Company (ACE). The Rating Outlooks are Stable. A full rating list is shown below. Approximately $3.2 billion of outstanding long-term debt is affected.
Pepco's rating and Stable Outlook reflect the low business risk of its regulated electric transmission and distribution operations in Maryland and the District of Columbia. Regulation in both jurisdictions is constructive, allowing for timely recovery for power procurement costs, Federal Energy Regulatory Commission (FERC) approved formula rates in retail rates, and energy efficiency and demand response costs. Of Pepco's distribution revenue, 100% is now decoupled from volumetric sales, thus eliminating fluctuations due to weather and changes
in usage patterns. However, the lower business risk due to decoupling has been partially offset by lower authorized return on equity (ROE) in both jurisdictions in recent rate cases. In August 2010, the Maryland Public Service Commission authorized a $7.8 million base rate increase based upon 9.83% ROE compared to Pepco's request for a $28.2 million rate increase based on a 10.75% ROE. Earlier, in March 2010, the District of Columbia Public Service Commission authorized a $19.8 million base rate increase based upon 9.625% ROE. Pepco was not successful in getting approval for a pension tracker in either of the jurisdictions; however, higher pension costs have been reflected in the rate case outcomes. High pension expense has been a major cause of under-earning at the utilities in recent years.
Pepco has a large capital expenditure plan of $2.5 billion over 2010-14.
A major portion of this capex is for the proposed Mid-Atlantic Power Pathway (MAPP) and other FERC regulated transmission investments. The proportion of transmission assets in Pepco's total rate base is expected to increase to 34% in 2014 from 19% currently, thereby boosting Pepco's overall ROE. Fitch views FERC regulation as constructive. Pepco enjoys minimal regulatory lag on transmission investments due to current year recovery of projected capital additions, a formula rate plan with annual true-ups and construction work in progress (CWIP) in the rate base for the MAPP project. Pepco is also making substantial investments in Advanced Metering Infrastructure (AMI) and smart grid. Fitch expects the heavy capex cycle to pressure leverage measures, yet remain consistent with Pepco's 'BBB+' IDR. Fitch expects Pepco's funds flow from operations (FFO)-to-total debt to stabilize around 18% and total debt-to-EBITDA at 3.6 times (x). It is Fitch's expectation that Pepco continues to finance its planned capex with a balanced mix of debt and equity infusion from the parent. Key rating drivers considered include customer growth, frequency and likely outcome of future rate cases and execution of the large capex plan.
Rating concerns include persistent regulatory lag that causes Pepco to file frequent rate cases, thus exposing the company to macro factors such as the overall state of the economy, interest rates and local politics. Regarding MAPP, while PJM recently affirmed the need to develop the project, a final decision is still forthcoming. There remains uncertainty regarding the timing of capex and, consequently, the financing plans of the company.
DPL's ratings and Stable Outlook are supported by stable and predictable cash flows generated from its regulated electric transmission and distribution and gas distribution operations. DPL does not own any generation assets and buys its power supply through periodic auctions.
It bears no commodity risk as state regulation allows for complete pass-through of purchased power costs. DPL enjoys constructive regulatory environments in both Delaware and Maryland. DPL has been successful in getting approval for decoupling in both these states.
After the resolution of the pending electric distribution rate case in Delaware (likely in third-quarter 2010), 100% of DPL's distribution revenues will be decoupled from volumetric sales. DPL has been successful in obtaining approvals for its proposed smart grid capex in Delaware. A decision in Maryland is still pending.
DPL is implementing an aggressive capital investment plan that calls for approximately $2 billion to be spent over 2010-14 and will more than double its existing rate base. Similar to Pepco's capex plan described above, a major part of DPL's capex is being channeled toward MAPP, other FERC regulated transmission projects and smart grid investments. The proportion of transmission assets in DPL's total rate base is expected to increase to 48% in 2014, from 31% currently, thus boosting its overall ROE. Minimal regulatory lag associated with FERC regulated transmission investments and the allowance of CWIP in the rate base for the MAPP project is expected to alleviate the pressure on credit metrics typically faced by utilities during a heavy capex cycle. Nevertheless, Fitch expects the credit metrics to weaken somewhat over the forecast period yet remain consistent with DPL's 'BBB+' IDR. Fitch expects DPL's FFO-to-total debt to stabilize around 18% and total debt to EBITDA at 3.7x. It is Fitch's expectation that DPL continues to finance its planned capex with a balanced mix of debt and equity infusion from the parent.
Fitch expects DPL to continue to file rate cases every 18-24 months to overcome the regulatory lag. Other rating concerns include the uncertainty associated with the timing of MAPP expenditures and related financing plans of the company.
ACE's ratings and Stable Outlook are supported by low business risk and stability of cash flows generated by its regulated electric transmission and distribution operations. ACE bears no commodity risk. It procures power to meet its supply needs through the New Jersey's Basic Generation Service (BGS) auction and the costs are directly passed through to the end-use customers. However, ACE does face timing mismatch in recovering the power costs associated with three power purchase contracts with non-utility generators (NUG). New Jersey Board of Public Utilities (BPU) provides full recovery of the NUG contract costs. ACE can sell the power in the spot market and any difference between the purchase and the sale price is recovered from customers. In the current environment of low spot power prices, Fitch expects ACE to under-recover the power costs of these contracts until such time that the rates currently being charged to the customers are reset. Thus, cash flow from operations is likely to be affected temporarily.
ACE has under-earned its authorized ROE in recent years due to lower than expected sales driven by economic slowdown and regulatory lag associated with higher pension expenses. The recently concluded rate case should enable ACE to reduce the gap between earned and authorized ROE. ACE was granted a $20 million rate increase on a $761.6 million rate base, 10.3% ROE and 49.1% equity ratio for new rates to be effective June 1, 2010. This compares to a rate increase request filed in August 2009 by ACE for a $54 million distribution rate increase (which was later reduced to $45.8 million) based on an 11.5% ROE, 49.58% equity ratio and $808.8 million rate base. Fitch expects ACE's FFO-to-total debt to stabilize at around 17% and total debt to EBITDA at 3.3x. Embedded in these forecasts is Fitch's expectation that the sales in ACE's service territory continue to recover, the outcome of future rate cases is constructive, and that the utility receives timely recovery of its power supply costs.
ACE's ratings also reflect a manageable capital expenditure plan, moderate external financing needs and absence of debt maturities over Fitch's forecast period. Rating concerns include the timing mismatch associated with the recovery of power supply costs of the NUG contracts and a high frequency of rate case filings to overcome the regulatory lag. Fitch also notes that ACE has not been able to get approvals from BPU for decoupling and smart grid investments, unlike its sister utilities.
Fitch affirms the following ratings with a Stable Outlook.
Potomac Electric Power Company
--IDR at 'BBB+';
--Secured Debt at 'A';
--Senior Unsecured Notes at 'A-';
--Short-term IDR/Commercial paper at 'F2'.
Delmarva Power & Light
--IDR at 'BBB+';
--Secured Debt at 'A';
--Senior Unsecured Notes at 'A-';
--Short-term IDR/Commercial paper at 'F2'.
Atlantic City Electric Company
--IDR at 'BBB';
--Secured Debt at 'A-';
--Senior Unsecured Notes at 'BBB+';
--Preferred Stock at 'BBB-';
--Short-term IDR/Commercial paper at 'F2'.
In addition, the following ratings are being withdrawn since the securities have been redeemed.
Potomac Electric Power Company
--Preferred Stock 'BBB'.
Delmarva Power & Light
--Preferred Stock 'BBB'.
Additional information is available at ' www.fitchratings.com :
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Applicable criteria available on Fitch's website at ' www.fitchratings.com :
' include.
--'Corporate Rating Methodology', Aug. 16, 2010;
--'Credit Rating Guidelines for Regulated Utility Companies', July 31, 2007;
--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines', Aug. 22, 2007;
--'Utilities Sector Notching and Recovery Ratings', March 16, 2010.
Related Research.
Utilities Sector Notching and Recovery Ratings
www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :
Corporate Rating Methodology
www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :
Credit Rating Guidelines for Regulated Utility Companies
www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :
U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines
www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :
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Fitch Ratings, New YorkPrimary AnalystShalini Mahajan,
+1-212-908-0351DirectorOne State Street PlazaNew York,
NY 10004orSecondary AnalystGlen Grabelsky,
+1-212-908-0577Managing DirectororCommittee ChairEllen
Lapson, +1-212-908-0504Managing DirectororMedia
RelationsBrian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com : mailto:brian.bertsch@fitchratings.com
