Fitch Rates PECO Energy First and Refunding Mortgage Bonds 'A'
KEY RATING DRIVERS
Strong Credit Profile: Fitch expects PECO's credit measures, aided by a rate increase implemented in January 2016, to remain strong relative to Fitch's target ratios for the rating level and PECO's peer group of 'BBB+' rated distribution utilities, but moderately weaker than recent historical results. Over the next few years, Fitch estimates debt/EBITDAR and funds from operations (FFO)-adjusted leverage to approximate 3.25x and 3.50x, respectively, compared with 3.0x and 3.1x in 2015. The increase reflects the effects of a rising capex plan and relatively flat sales growth.
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 alternative regulatory model implemented in Pennsylvania to recover certain capital costs also reduce business risk.
Alternative Regulatory Model: Fitch considers regulatory legislation enacted in Pennsylvania in 2012 (HB 1294) to be supportive of credit quality. The law allows the state's Public Utility Commission (PUC) to establish a distribution system investment charge (DSIC) to provide timely recovery of certain capital costs incurred to enhance electric and gas distribution systems. Once implemented, the DSIC is updated quarterly. The law also allows traditional rate filings to include fully forecasted test years, further reducing regulatory lag.
Constructive Rate Order: PECO implemented a $127 million rate increase effective Jan. 1, 2016, following the approval of a settlement agreement by the PUC. The approved increase equates to about two-thirds of PECO's $190.1 million rate request. The 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 PECO.
Demand Reduction: Pennsylvania Act 129 (Act 129) requires Pennsylvania utilities to reduce electric consumption, with the companies absorbing the associated revenue loss between rate cases. The PUC recently approved phase III of the energy efficiency and consumption plan, requiring PECO to reduce consumption further by 2021. PECO met the initial consumption reduction targets of 1% by 2011 and 3% by May 31, 2013. Importantly, Act 129 provides a surcharge to recover implementation costs (other than lost sales) on a timely basis.
Rising Capex: Capex is forecasted to rise about 12% to $675 million in 2016 from $601 million in 2015 and to range between $775 million and $750 million over the following four years. The growth in capex primarily reflects investments in electric reliability and acceleration of a gas pipeline replacement program. The financial impact is moderated by the extension of bonus depreciation and the surcharge mechanism associated with Act 129.
--Relatively flat electric load growth;
--Retail gas load growth ranging between 0.5% and 1.0%;
--Electric distribution rate increase of $127 million effective Jan. 1, 2016;
--Equity capital of 53%-54% of total capital;
--Five-year capex plan of $3.7 billion.
Positive: Positive action could be considered if adjusted debt/EBITDAR and FFO lease-adjusted debt remain comfortably below 3.4x and 4.0x, respectively.
Negative: Given the headroom in existing ratings, a downgrade is not likely, but could be considered if debt/EBITDAR and FFO lease-adjusted debt exceeded 3.70x and 4.8x, respectively, on a consistent basis.
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 2021 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. (EXC) can lend to, but not borrow from, the money pool. As of June 30, 2016, PECO had no short-term borrowings and available cash of $203 million.