NEW YORK–(BUSINESS WIRE)– Fitch Ratings rates Delmarva Power & light Co.’s (DPL) new $ 175 million first mortgage bonds, 4.15% series due May 15, 2045 at ‘A’. The bonds are the second of this series and have identical terms as the previous $ 200 million issued in May 2015. The Rating Outlook is Stable.
Proceeds of the offering will be used to repay $ 100 million of outstanding 5.22% notes maturing Dec. 30, 2016 and the remainder to repay outstanding commercial paper and for general corporate purposes.
KEY RATING DRIVERS
Exelon Merger: The recently closed acquisition of DPL and its affiliates by Exelon Corp. (EXC) has no direct impact on DPL’s credit metrics, but does provide a stronger, better capitalized parent company with far greater financial flexibility that supports current ratings. Fitch expects DPL to benefit from improved operating efficiency and lower costs as a result of the merger. The ratings assume EXC will provide equity to support capex and to maintain the authorized capital structure.
Low Risk Operations: DPL owns and operates regulated electricity and natural gas distribution and transmission networks that operate under cost of service-based regulation in Delaware and Maryland with limited commodity price risk and the associated cash flow volatility. Although DPL retains the provider of last resort obligation for electric and gas customers that do not choose an alternative energy provider its’ electric supply costs are recovered from customers through fuel adjustment mechanisms. Also, in Maryland, which accounts for about 35% of retail electric sales, DPL operates with a Bill Stabilization Adjustment (BSA) that reduces volumetric exposure and stabilizes revenue. The BSA provides for a fixed distribution charge per customer rather than a usage based charge. Any deviation from the approved charge is either recovered from or credited to customers effectively decoupling revenue from sales.
Regulatory Risk: Regulatory risk is heightened following two-years of rate case avoidance during the review of the EXC merger with potential rate shock a primary concern. DPL requested electric and gas rate increases in Delaware in May 2016 and an increase in electric rates in Maryland in July. Final rate decisions are expected in May and February 2017 in Delaware and Maryland, respectively. Going forward, Fitch expects DPL to file rate cases every 12-15 months.
Credit Metrics: Credit quality measures are moderately weak for the current rating level following two-years of rate case avoidance but should improve as the company implements its strategy of annual rate filings. Initially, the expected improvement will be hindered by rate concessions agreed to as part of the merger approval process. Fitch expects equity support from EXC to fund the rate concessions and to maintain a balanced capital structure.
Moderate Capex: Projected capex of $ 1.7 billion over the next five-years is moderate, but will require external funding and rate support. Over the next three-years spending levels are consistent with the prior three years and then decline over the last two years of the forecast.
Ring Fencing: DPL has several ring-fencing provisions to protect the utility from it direct and indirect parent companies. These include maintaining a rolling 48% equity ratio, maintenance of separate books and records and maintenance of separate debt. Other measures include creation of a bankruptcy remote special purpose (SPE) entity to hold 100% of the equity of direct parent PHI; the Board of Directors of the SPE has four directors, one of which is independent. In addition, the seven member PHI board includes one director from each of PHI’s utility subsidiaries
–Annual rate filings beginning in 2016;
–Annual customer growth of approximately 0.5% annually;
–O&M increases of about 2% annually;
–Capex funded in a manner to preserve existing capital structure.
Positive Rating Action: Positive rating action is not expected in the near term given the current level of credit protection measures, but could occur if Debt/EBITDAR and FFO lease-adjusted leverage fall comfortably below 3.5x and 4.25x, respectively, on a sustainable basis.
Negative Rating Action: Negative rating action may be considered if FFO lease-adjusted leverage is above 4.5x and/or adjusted debt/EBITDAR above 3.6x on a consistent.
Commercial paper borrowings and a bank credit agreement are the primary sources of liquidity to supplement cash from operations. Currently, DPL also participates in a corporate money pool with its direct parent Pepco Holdings LLC and utility affiliates Potomac Electric Power Company (Pepco) and Atlantic City Electric Company (ACE). The commercial paper program allows for maximum borrowing of $ 500 million but is effectively limited by the available borrowing capacity under the company’s bank credit agreement. DPL is currently allocated a $ 300 million sub-borrowing limit under a $ 900 million syndicated unsecured credit facility the company shares with its utility affiliates. The sub-limits can be increased or decreased by each borrower as long as the total does not exceed $ 900 million. The credit facility matures in May 2021.
Date of Relevant Rating Committee: March 24, 2016.
Disclosure: There was no financial statement adjustments made that were material to the rating rationale outlined above.
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