Fitch Rates Baltimore G&Es Senior Notes 'A-'
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.
--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.
[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.]
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.