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21 Mar 2016
Approximately $3 billion of debt affected
New York, March 21, 2016 -- Moody's Investors Service, ("Moody's") today
affirmed the Baa1 senior unsecured rating at PSEG Power LLC (PEG Power).
The outlook remains stable. The rating affirmation follows our
assessment of the US merchant power sector in the wake of a sustained
period of low commodity prices, including natural gas and electricity.
....Outlook, Remains Stable
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Baa1
....Senior Unsecured Regular Bond/Debenture,
....Senior Unsecured Shelf, Affirmed
"PEG Power's financial profile will remain strong over the
next few years, and we calculate a ratio of cash flow, adjusted
for maintenance capital and nuclear fuel, to debt exceeding 25%",
said Swami Venkataraman, Vice President -- Senior Credit Officer.
"PEG Power's corporate finance policies will also take credit
friendly steps to maintain its current leverage while building three new
combined cycle gas plants."
PEG Power's Baa1 senior unsecured rating is the highest among wholesale
merchant generators in the US and reflects the strong competitive position
and locational advantages of PEG Power's generating assets. These
locational advantages arise mainly from the generating assets that reside
inside premium capacity pricing zones within the Pennsylvania New Jersey
Maryland Interconnection Region (PJM). As a result, PEG Power
is better positioned than peers to withstand the current downturn in the
merchant power markets. PEG Power also has low leverage,
a hedging strategy that provides a degree of cash flow visibility and
The weak energy markets have significantly reduced margins at PEG Power's
nuclear power plants, partly offset by improved margins at the company's
natural-gas fired units. At current market prices,
Moody's expects the nuclear units to barely breakeven in 2016 but Moody's
see margins rising to the $4-5/MWh range in 2017-18.
However, the company has a plan to reduce costs at its nuclear units
to help improve margins. PEG Power also has a hedging program wherein
the 2016 hedges are at prices significantly above current market prices.
Base-load generation is hedged 100% for 2016, 70-75%
for 2017 and 25-30% for 2018. For these reasons,
we expect the financial profile to remain adequate for PEG Power's rating,
with CFO Pre-WC coverage of debt in excess of 40%.
PEG Power also enjoys strong margins in its basic gas supply service (BGSS)
business which supplies natural gas to C&I customers. PEG Power
has transmission rights that enable it to buy cheaper gas in the Marcellus
for supply to PSE&G customers. Marcellus gas also supplies
about 75% of PEG Power's fuel requirements for its gas plants,
boosting margins there as well.
PEG Power has an ongoing construction program of $2.3-2.5
billion in new plant capex for the 2015-19 period. This
includes three new combined cycle gas plants, equity for the PennEast
gas pipeline and 167 MW of solar projects. Despite these investments,
Moody's expects additional debt compared with Dec 31, 2014 to be
limited, with the bulk of the outlays financed from operating cash
flow, lower dividends to parent PSEG, and the benefits of
bonus depreciation. This is a conservative financial policy that
will support PEG Power's financial profile.
PEG Power's financial metrics have been very strong historically.
CFO Pre-WC coverage of interest and debt have averaged 10.3x
and 54% over the 2013-15 period, and Retained Cash
Flow (RCF)/Debt averaged 26.4%. These are stronger
than our benchmark expectations for the rating under our Unregulated Power
Companies methodology. Over the next few years, credit metrics
are expected to be slightly weaker than the past, although CFO Pre-WC
coverage of debt is still expected to exceed 40% and remain adequate
for the rating. Management targets a minimum threshold FFO/Debt
ratio for PEG Power of 30%.
PEG Power's liquidity is considered strong. The company has two
syndicated revolving credit facilities with an aggregate total capacity
of $2.6 billion (of which $1.6 billion matures
in 2019 and $1.0 billion in 2020, except for some
stub maturities in 2016 and 2018). Only $164 million of
the syndicated facilities was utilized as of Dec 31, 2015.
The only material covenant is a maximum debt to capitalization covenant
of 65%, under which PEG Power has ample cushion. The
credit agreement contains cross defaults to other indebtedness of PEG
Power above a threshold and to indebtedness of its major subsidiaries
(as defined) and subsidiary guarantors, but not to PSEG or PSE&G.
At PEG Power, Moody's adjusted free cash flow was positive by $189
million in 2015, but Moody's expects free cash flow to be negative
in 2016-17 if one considers dividends to PSEG and capex on the
new combined cycle gas plants.
The stable rating outlook for PEG Power is based on our expectations for
a consistent financial profile arising out of the company's significantly
hedged position over the next 18 months, a relatively protected
market position with significant entry barriers and expectations for reliable
operations at its power plants.
What Could Change the Rating - Up
An upgrade of PEG Power's rating is unlikely in the medium term in light
of weak merchant market conditions, our expectation that gas prices
will remain low and ongoing dividend and capex requirements. However,
PEG Power's rating could be upgraded in the event of a significant and
sustainable improvement in its financial profile. Such an improvement
would entail a material increase in the average life of its hedges resulting
in a longer term sustainable financial profile, supported largely
by hedges, with CFO Pre-WC coverage of interest and debt
above 9x, and 45%, respectively.
What Could Change the Rating - Down
PEG Power's rating could be downgraded if there were a material decline
in the competitive position of PEG Power's fleet due to a change in market
dynamics or the company began to exhibit a materially weaker financial
profile, such as CFO Pre-WC coverage of interest and debt
being about 6x and 30%, respectively.
The principal methodology used in these ratings was Unregulated Utilities
and Unregulated Power Companies published in October 2014. Please
see the Ratings Methodologies page on www.moodys.com for
a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
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to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Swami Venkataraman, CFA
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Affirms PSEG Power LLC's Baa1 Senior Unsecured Rating; Outlook Stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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