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04 May 2011
Toronto, May 04, 2011 -- Today Moody's Investors Service affirmed the ratings of Public Service
Enterprise Group Incorporated (PSEG, (P)Baa2 senior unsecured shelf),
PSEG Power LLC (Power, Baa1 senior unsecured) and Public Service
Electric and Gas Company (PSE&G, Baa1 Issuer Rating).
PSE&G's rating outlook was revised to positive from stable.
The rating outlooks of PSEG and Power remain stable.
The change in PSE&G's outlook to positive reflects the steady
improvement in PSE&G's financial profile in recent years in
the context of PSE&G's relatively low business risk profile
as an electric and gas transmission and distribution (T&D) utility
operating in a generally supportive regulatory environment. It
also reflects our belief that, ignoring the temporary near-term
cash flow benefit provided by federal bonus depreciation legislation,
there could be further modest improvement in key financial ratios such
as (CFO pre-WC -- Dividends) / Debt and Debt / Capitalization.
Power's Baa1 senior unsecured debt rating reflects the competitiveness
of its generating assets; its hedging strategy that provides a degree
of cash flow stability; and its good liquidity profile. These
positive rating considerations are balanced by Power's moderately-high
risk merchant operations, market concentration risk, and the
expectation that Power's cash flow will weaken as existing hedges roll
off and are replaced at lower price levels. We anticipate Power
will utilize expected asset sale proceeds to reduce debt and prevent any
material deterioration in key financial ratios.
PSE&G'S Baa1 Issuer Rating (senior unsecured) reflects the following
key rating factors: its low risk T&D business model, a
relatively supportive and constructive relationship with its principal
regulator, and the expectation that credit metrics will strengthen
in the near-term due to the continuation of bonus depreciation,
the increasing proportion of higher returning transmission investments
and an anticipated reduction in pension underfunding. These positive
rating considerations are balanced by PSE&G's elevated capital spending
PSEG's Baa2 senior unsecured rating is one notch weaker than the Baa1
senior unsecured ratings assigned to Power and PSE&G, reflecting
the structural subordination of PSEG's creditors to creditors of the principal
operating companies. At December 31, 2010, there was
no long term debt outstanding at the parent, and Power and PSE&G
accounted for virtually all of PSEG's consolidated debt. PSEG's
(P)Baa2 assigned rating is consistent with the Baa2 rating implied by
the Unregulated Utilities and Power Companies rating methodology.
We also consider the Regulated Electric and Gas Utilities rating methodology
as utility operations accounted for approximately 40% of PSEG's
An upgrade of Power's rating appears unlikely in the foreseeable future
in light of the inherently risky nature the wholesale merchant generation
business and the expectation that power prices will remain weak.
However, should Power achieve an increase in the average life of
its contracts and improve its financial metrics on a sustainable basis
(CFO pre-WC Flow + Interest) / Interest (Cash Flow Interest
Coverage) in approaching 9x, CFO pre-WC / Debt above 45%
and Free Cash Flow/Debt above 16%), its rating could be upgraded.
Power's rating could be downgraded if its financial metrics were to exhibit
a material deterioration from current levels. In our opinion,
Cash Flow Interest Coverage below 7x, CFO pre-WC / Debt below
36%, and Retained Cash Flow / Debt below 25% would
likely result in a downgrade. Power's rating could be negatively
impacted by a number of other factors including:
any significant regulatory or legislative intervention in the RPM
pricing mechanism or other aspects of the PJM market structure or the
BPU's BGS auction structure
a decision to build a new nuclear facility unless the increased
execution and financing risk associated with such an undertaking were
to be balanced by a significant strengthening of Power's financial profile
future changes in environmental legislation or regulation that
could impose significant costs on Power and if such costs are not quickly
reflected in the market price of electricity, Power's financial
profile could deteriorate
any material shift in Power's hedging strategy that results in
lower or more volatile cash flows
the development of significant new transmission or generation capacity
that significantly reduces the constraints and market pricing in Power's
PSE&G's ratings could be upgraded if there is a sustainable improvement
in credit metrics such as cash flow interest coverage in excess of 4.5x,
CFO pre-WC to debt in excess of 22%, (CFO pre-WC
--Dividends) / Debt greater than 17% and Debt / Capitalization
PSE&G's ratings could be downgraded if there was a sustained weakening
of its financial profile, for instance Cash Flow Interest Coverage
below 3.3x and CFO pre-WC to debt below 16%,
combined with a deterioration in the supportiveness of its regulatory
environment, for instance negative legislative or regulatory actions
that increase the company's business or financial risk profile.
All else being equal, a sustainable improvement in PSEG's financial
profile with Cash Flow Interest Coverage above 6x and CFO pre-WC
/ Debt above 31%.
PSEG's ratings could be downgraded if there was a sustained deterioration
PSEG's financial metrics (Cash Flow Interest Coverage below 4.7x,
CFO pre-WC / Debt below 26% and RCF / Debt below 22%)
combined with a deterioration of Power's key markets, its
competitive position or hedging strategy; or the deterioration of
PSE&G's regulatory environment. The incurrence of material
holding company debt, particularly in conjunction with a shareholder
oriented financial strategy, would also place downward pressure
on the rating.
The last rating actions with respect to PSEG and PSE&G occurred on
July 17, 2008 when the ratings of both companies were affirmed (PSEG,
Baa2 senior unsecured; PSE&G, Baa1 issuer rating) and the
rating outlooks for both companies were changed to stable from negative.
The last rating action with respect to Power occurred on December 20,
2004 when its Baa1 senior unsecured rating was affirmed and its rating
outlook was revised to stable from negative.
The principal methodologies used in this rating were the Unregulated Utilities
and Power Companies rating methodology, and Regulated Electric and
Gas Utilities rating methodology which were published in August 2009.
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Canada Inc.
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Canada Inc.
Moody's affirms ratings of PSEG, PSEG Power & PSE&G; PSE&G's outlook revised to positive
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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