Fitch Ratings has assigned a 'A+' rating to PECO Energy Company's new issue of $375 million first and refunding mortgage bonds (FMBs) due 2051.
The proceeds will be used for the repayment of $300 million FMBs due Sept. 15, 2021 and general corporate purposes. PECO's Long-Term Issuer Default Rating (IDR) is 'A-'/Outlook Stable.
Key Rating Drivers
Strong Credit Profile: PECO's stable, regulated electric transmission and distribution (T&D) and natural gas distribution operations have a low business risk profile. PECO's financial position is consistent with its rating, but continued capex increases have decreased headroom at the current rating level. Fitch estimates PECO's FFO leverage will average approximately 4.3x with FFO interest coverage of over 6.0x. PECO's $12.3 billion 2024 forecast rate base is expected to be 65% electric distribution, 25% gas distribution and 10% electric transmission.
Modest Coronavirus Impacts: As a result of the pandemic, PECO's electric sales to commercial and industrial customers declined significantly in 2020 by approximately 8.4% on a weather-adjusted basis. This was partially offset by 5.6% growth in the residential segment, resulting in an overall weather-adjusted kilowatt-hour sales decline of 3.5%. PECO's residential sales accounted for approximately 66% of its 2020 revenues but approximately 40% of unit sales.
On May 13, 2020, the Pennsylvania Public Utility Commission (PAPUC) authorized the state's utilities to defer coronavirus-related expenses incurred beginning on March 13, 2020. PECO does not benefit from decoupling or a bad debt tracker. Thus far, bad debt expense has been manageable; however, the company has increased its allowance for credit losses and included the electric distribution portion of 2020 actual and 2021 estimated coronavirus-related incremental bad debt expense in its March 2021 electric distribution rate case filing.
Gas Distribution Rate Case: The PAPUC issued an order on June 22, 2021 in PECO's first gas distribution rate case in 10 years. The commission approved a $29.1 million revenue increase effective July 1, 2021. The increase was based upon 10.24% ROE and 53.38% equity capitalization. The rate case was initiated on Sept. 30, 2020 when the company requested a $68.7 million revenue increase based on a 10.95% ROE and equity capitalization of 53.38%. Fitch views the rate case decision as generally favorable but slightly below our expectations.
Electric Distribution Rate Case Filed: On March 30, 2021, PECO filed an electric distribution rate case. The company is requesting a $246 million base rate increase based upon a 10.95% ROE and equity capitalization of 53.41% and test year ending Dec. 31, 2022. PECO's last electric rate case resulted in a $25 million rate increase effective Jan. 1, 2019, which was net of tax savings associated with the Tax Cuts and Jobs Act of 2017. The outcome was reached through a black-box settlement and return parameters were not disclosed. According to the rate case filing, PECO will have invested more than $3.1 billion in new and replacement electric distribution plant over Jan. 1, 2019 to Dec. 31, 2022. A decision is expected during 4Q21.
Rising Capex: Capex is forecast to increase 10% to $5.225 billion in 2021-2024 compared with $4.75 billion for the prior-year forecast, and translates to an 10% average rate base increase through 2024. Investments in electric system reliability and acceleration of the natural gas pipeline replacement program drive the increase.
Parent/Subsidiary Rating Linkage: The rating linkage between Exelon Corporation (Exelon; BBB+/Rating Watch Negative) and its subsidiaries is weak to moderate. Each subsidiary is important to Exelon, and the ratings of the competitive generation business, ExGen, benefit from ownership by Exelon. Many utility subsidiaries have ring-fencing provisions. Legal ties are weak, as Exelon does not guarantee the debt obligations of any subsidiaries and no cross-default provisions exist among Exelon and its utility subsidiaries.
Due to these linkages, Fitch typically limits the notching difference between Exelon and its subsidiaries to one to two notches. Fitch applies a bottom-up approach in rating Exelon utility subsidiaries such as PECO, which are rated based on the strength of their balance sheets, the quality of their service territories and the constructiveness of their regulatory environments. Fitch rates Exelon on a consolidated basis.
Derivation Summary
PECO's credit profile as a regulated T&D utility is comparable with other peers with 'A-' Long-Term IDRs, such as Connecticut Light & Power Company (CL&P; A-/Stable) or Exelon subsidiary Baltimore Gas and Electric (BG&E; A-/Stable). PECO's FFO leverage for the TTM ended Dec. 31, 2020 was 4.1x and is expected to average approximately 4.3x over the forecast period. For the same period, CL&P's FFO leverage is 5.3x. Fitch expects CL&P's FFO leverage to average around 3.8x-4.0x through 2023. BG&E's FFO leverage for the TTM ended Dec. 31, 2020 was 3.1x, and Fitch expects it to average approximately 3.8x over the forecast period, including energy-efficiency capex.
PECO, CL&P and BG&E serve similar numbers of customers, at 1.7 million for PECO and around 1.3 million each for CL&P and BG&E. Fitch considers Pennsylvania regulation to be more supportive than in Connecticut or Maryland. PECO has a stronger credit profile than Exelon's largest utility subsidiary, Commonwealth Edison Co. (ComEd; BBB+/Stable). ComEd's FFO leverage was 4.3x for the TTM ended Dec. 31, 2020, but Fitch expects it to average approximately 4.5x over the forecast period, including energy-efficiency capex. PECO serves significantly fewer customers than ComEd (1.7 million against 4.0 million). Fitch considers Pennsylvania regulation to be more supportive than Illinois, especially considering Illinois's formula rate plan's low ROE calculation.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Dividends managed to achieve allowed equity ratio;
Relatively flat sales and customer growth, excluding effects of coronavirus;
Four-year (2021-2024) capex plan of $5.225 billion.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
As a result of parent-subsidiary linkages, an upgrade is not contemplated at the current time given Exelon's Negative Watch.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained FFO leverage at or above 4.3x on a sustained basis;
Unexpected negative regulatory developments.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
PECO's $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 facility extends to May 2024. PECO also participates in a corporate money pool along with its affiliates ExGen and Exelon Business Services Co. LLC. Parent Exelon can lend to, but not borrow from, the money pool. PECO had no CP borrowings or draws under its credit facility as of June 30, 2021. Cash and cash equivalents as of June 30, 2021 were $376 million.
PECO's total adjusted debt (including current maturities) as of June 30, 2021 totaled approximately $4.3 billion, including $184 million of subordinated debentures that qualify for 50% equity credit under Fitch's methodology. Other than the subordinated debentures, all of the long-term debt outstanding is first mortgage bonds secured by PECO's utility property. After giving effect for the repayment of the Sept. 15, 2021 maturity, PECO's next corporate maturity is $350 million in 2022.
Issuer Profile
PECO Energy is a regulated electric T&D and natural gas distribution utility in Pennsylvania.
Summary of Financial Adjustments
As of June 30, 2021, PECO had $184 million of subordinated debentures that qualify for 50% equity credit under Fitch's rating methodology.
Date of Relevant Committee
23 February 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING
PECO Energy Company
senior secured
LT A+ New Rating
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THE CONNECTICUT LIGHT AND POWER COMPANY 
