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Global Credit Research - 29 Nov 2010
Approximately $4.7 billion of securities affected
New York, November 29, 2010 -- Moody's Investors Service assigned a Ba2 rating to a planned issue
of senior secured notes by Puget Energy, Inc. and affirmed
all of the company's other existing ratings, including its
Ba2 Term Loans, as well as its stable rating outlook. Concurrently,
Moody's affirmed all the existing ratings and the stable rating
outlook of Puget Energy's utility subsidiary, Puget Sound
Energy, Inc. (PSE), including ratings as follows:
Baa1 senior secured first mortgage bonds, medium-term notes
and tax-exempt debt; Baa3 Issuer Rating; Baa3 bank credit
facilities; Ba1 junior subordinated notes; (P) Baa1/(P)Baa3
shelf rating for prospective issuance of senior secured and senior unsecured
debt, respectively; and P-3 short-term rating
for commercial paper.
The rating assignment and affirmations take into account that the planned
senior secured notes are, subject to certain exceptions, secured
by substantially all of Puget Energy's assets and equity interests
owned by its unrated parent company, Puget Equico. The collateral
consists mainly of all of the issued and outstanding stock in Puget Energy's
wholly owned operating subsidiary, PSE. The same security
also applies to Puget Energy's existing bank debt, which is
also rated Ba2. Moody's anticipates that Puget Energy will
use the net proceeds from the issuance of the senior secured notes to
repay a portion of its outstanding bank debt. The Ba2 rating also
considers that Puget Energy is following through on plans to lengthen
and diversify its debt maturity profile and that all of Puget Energy's
debt is structurally subordinated to all the existing and future indebtedness,
obligations, and other liabilities of PSE.
"The Ba2 rating reflects a wider than typical notching from the
PSE Baa3 senior unsecured rating due to the significant financial risks
that exist since almost $1.5 billion of standalone debt
resides above PSE following the February 2009 ownership change and we
anticipate that this amount will increase" said Kevin Rose,
Moody's lead analyst for Puget Energy. "The wider notching
also incorporates the ring-fence mechanisms in place to protect
investors at the PSE level, which could potentially limit the upstream
of distributions to service the standalone parent debt" Rose added.
The ratings for Puget Energy and PSE incorporate the relatively low risk
utility operations of PSE, whose business profile is characterized
by generally collaborative regulatory relationships and reasonably credit
supportive rate case outcomes, efficient handling of growing electric
and gas supply needs, solid credit metrics under Moody's Rating
Methodology for Regulated Electric and Gas Utilities published in August
2009, and ample access to committed bank credit facilities to supplement
internal cash flow. Prospectively, we currently see Puget
Energy as reasonably well positioned at Ba2, assuming continuation
of credit supportive regulatory decisions in the pending and periodic
future rate case proceedings that we expect for PSE given a very large
multi-year capital program over the next few years, albeit
reduced from earlier levels planned due to the effects of the economy
and changes to the company's proposed resource plans. The
ratings capture the increase in financial risk we see as Puget Energy
is expected to continue to support PSE's funding needs primarily with
draws under the holding company's committed $1.0 billion
capital expenditure facility, thereby considerably weakening key
credit metrics from stronger levels noted at September 30, 2010,
which are largely due to accounting conventions related to the ownership
change in February 2009. Despite the sizable standalone parent
debt that increases dependence on PSE to service those obligations,
we currently believe that PSE will have sufficient flexibility to comply
with key financial covenants in its bank revolvers and regulatory mandates
that govern its dividend distributions to the parent. Moreover,
there are financial covenants that preclude Puget Energy's payment of
distributions to private equity investors under certain circumstances,
which afford some additional protection for debt holders at the parent
The stable rating outlooks for Puget Energy and PSE reflect our view that
PSE can sustain its recent financial performance under its private equity
ownership structure, which is paramount given the significant amount
of structurally subordinated standalone debt at the parent. Our
expectations assume that sufficiently conservative financing strategies
are maintained and that PSE continues to receive supportive decisions
from the Washington Utilities and Transportation Commission (WUTC) in
the pending and periodic rate cases expected in the future. Under
this scenario, PSE should have ample flexibility to pay dividends
to Puget Energy in support of meeting the parent's debt obligations.
An upgrade in the near term is unlikely given the significant standalone
debt that currently exists at Puget Energy which is expected to increase
over the next several years. Puget Energy and PSE could be upgrade
candidates in the medium term if stronger than anticipated consolidated
financial results are achieved, while PSE copes with the challenges
of executing a large capital program and helping service the parent's
standalone debt. In particular, if Puget Energy can produce
consolidated CFO Pre-W/C plus interest to interest and consolidated
CFO Pre-W/C to debt closer to 3x and the low-to-mid-teens,
respectively, on a sustainable basis excluding the effects of accounting
conventions related to the ownership change, then a positive rating
action could occur. As for PSE, producing CFO Pre-W/C
plus interest to interest and CFO Pre-W/C to debt closer to the
mid-4x and 23%, respectively, on a sustainable
basis could overcome the existing constraints in the rating and provide
impetus for positive rating action.
Adding more standalone debt at Puget Energy than currently expected that
creates undue pressure for higher utility dividends could lead to a downgrade
at both companies, especially if there is any unexpected decline
in the WUTC's supportiveness. Moreover, shortfalls in consolidated
financial performance that reduce Puget Energy's CFO Pre-W/C
plus interest to interest and consolidated CFO Pre-W/C to debt
well below 2.8x and 10%, respectively, for an
extended period of time, could lead to a downgrade. A downgrade
of PSE's ratings could result from shortfalls in its performance
that reduce CFO Pre-W/C plus interest to interest and CFO Pre-W/C
to debt well below 3.0x and the low teens, respectively,
for an extended period of time.
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in August 2009.
Puget Energy, Inc. is a holding company whose sole subsidiary
is Puget Sound Energy, Inc., a combination electric
and natural gas utility. Both companies are headquartered in Bellevue,
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Kevin G. Rose
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Ba2 to Puget Energy's planned senior secured note issue; outlook stable
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