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Global Credit Research - 24 May 2010
New York, May 24, 2010 -- Moody's Affirms Duquesne Light; Outlook Stable
Moody's Investors Service has affirmed the ratings and stable outlooks
of Duquesne Light Holdings, Inc. (DLH) and its regulated
electric utility subsidiary, Duquesne Light Company (DLC).
Ratings affirmed include:
- Duquesne Light Holdings senior unsecured, Ba1; stable
- Duquesne Light Company senior secured, A3; stable
- Duquesne Light Company issuer rating at Baa2; stable outlook
- Duquesne Light Company preferred stock at Ba1; stable outlook
The affirmation reflects the benefits of recent decisions by the company
to stabilize its capital structure as well as our expectation that future
actions to be taken over the next 12-18 months could slowly begin
to improve DLH's credit profile.
DLH has exhibited a leveraged credit profile for a number of years.
The debt at the parent level is a legacy of the company's 2007 buyout,
led by an investor consortium including Macquarie Infrastructure Partners
and Diversified Utility & Energy Trust. Since that time there
has been no notable improvement in consolidated credit metrics.
However, in 2009 the consortium took several positive steps including
cutting the upstream dividend from DLH and contributing additional equity
of $200 million. These actions helped to offset the negative
impact of higher capacity costs in PJM that have negatively affected operating
results. As a result, DLH's 2009 CFO (pre-w/c)
to debt was approximately 1O%, and RCF to debt was 9%;
both at the high end of the Ba1 rating category. DLC continues
to be strongly positioned at the Baa2 rating level with CFO (pre-w/c)
to debt of 25% in 2009.
Additional clarity on the company's POLR obligations was communicated
on May 20, 2010, when the Pennsylvania Public Utility Commission
(PUC) approved DLC's plan to provide fixed-price default
service to residential customers for the period Jan-2011 through
May-2013. Unlike other pure transmission and distribution
utilities in Pennsylvania, DLC continues to retain an element of
risk with the new POLR V plan as power supply is not a direct pass-through
and the company must carefully hedge its obligations though the POLR period.
Additionally, to the extent power prices decline the company will
be subject to "switching risk" given customer choice availability
in PA. More positively, there is now greater certainty on
capacity costs through mid-2014 and this cost is now considered
in the established average rate of $78.60/MWh under POLR
While we note the positive improvements to the capital structure and the
prospect for strengthening given the current dividend policy, we
are affirming the ratings at the current levels given the continued leveraged
capital structure. Specifically, the notching differential
between DLH and DLC continues to reflect the significant level of parent
holding company debt, and the structural and contractual subordination
to debt at the company's core regulated electric utility operating
subsidiary, DLC, and DLH's primary dependence on cash
flows from DLC which represented 70 % of consolidated cash from
operations in 2009 to service that debt. At March 31, 2010
debt at the holding company represented approximately 75% of consolidated
The last rating action for Duquesne was on August 3, 2009 when DLC's
senior secured ratings were upgraded one notch to A3 in line with our
sector-wide review of first mortgage bonds in the utility sector.
The principal methodology used in rating Duquesne is Moody's Regulated
Electric and Gas Utilities methodology, published in August 2009
and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in Pittsburgh, Pennsylvania, Duquesne Light
Holdings is an electric utility holding company owned by an investor consortium
led by Macquarie Infrastructure Funds and Diversified Utility Energy Trust.
Revenue for the year ended December 31, 2009 was $1.1
billion. Its primary operating subsidiary, Duquesne Light
Company, is primarily engaged in providing transmission, distribution
and supply of electricity to approximately 588 thousand customers in Southwestern
Infrastructure Finance Group
Moody's Investors Service
Moody's Affirms Duquesne Light; Outlook Stable
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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