Fitch Ratings assigns a 'BBB-' rating to the Philadelphia Gas Works (PGW) $56,000,000 Eighth Series A (1998 General Ordinance) revenue refunding bonds. These fixed-rate bonds will be on parity with $915,580,000 of senior 1998 General Ordinance bonds and subordinate to $266,831,793 of bonds issued under the 1975 General Ordinance. Under the 1998 General Ordinance, PGW issues senior and subordinate debt. All of the debt under the 1998 General Ordinance is subordinate to the 1975 General Ordinance.
Fitch also affirms the following outstanding PGW revenue bonds:
--1975 General Ordinance at 'BBB';
--1998 General Ordinance at 'BBB-'.
The Rating Outlook is Stable.
The $56 million proceeds from the fixed-rate bonds will refund a portion of PGW's $311 million long-term variable rate debt. The rating takes into consideration the utility's plans to restructure the remaining long-term variable rate debt. Specifically, PGW plans to replace an existing standby bond purchase agreement (SPBA) expiring July 30, 2009 with letters of credit (LOCs). The direct-pay LOCs are anticipated to be provided from Bank of America, J.P. Morgan, Scotia Bank, and Wachovia. Implementing the LOCs as planned should help to stabilize the utility's debt position for the next 24 months. Positively, PGW would reduce its variable rate debt as a percentage of total debt to 20% from the current 24% based upon this plan. Fitch notes that in the event that the variable rate transaction does not proceed, PGW would refund all of its variable-rate debt with fixed-rate debt.
PGW's ratings reflect the Public Utilities Commission's (PUC) regulation of the utility's rates. Although the PUC approved in December 2008 extraordinary rate relief to allow PGW to generate $60 million in part to meet debt-related costs, the regulator has not historically been supportive of the utility's requested rate increases.
Also reflected in PGW's ratings is the utility's maintenance of a tight liquidity position, which relies on external liquidity support from commercial paper to fulfill operating commitments and investments in capital projects. With below average income levels among its customers, PGW relies on federal assistance for qualified customers to supplement the utility's revenues. While this program has historically been a reliable source of funds for PGW's customers, Fitch notes that these funds are vulnerable to federal appropriation.
Favorably, the rate of customer bill collections has remained at a solid level of at least 95% since 2005, resulting in improved cash flow for PGW. This is an improvement over the 86% collection rate experienced prior to 2005. Fitch also notes that PGW recently repaid its $45 million loan from the city of Philadelphia, although the city continues to grant back the utility's annual $18 million return on investment payment and expects to do so through fiscal 2013. Additional credit strengths include the utility's solid management team and well maintained system assets.
Looking forward, Fitch will monitor the following key drivers that could affect PGW's ratings:
--Successful restructuring of variable rate debt and continued ability to meet debt obligations without significant drain on the utility's liquidity.
--Long-term, Fitch will monitor PGW's continued progress in managing risks associated with variable rate debt (representing 20% of total debt outstanding). While PGW has not had to post collateral on its interest rate swaps, Fitch believes that it does not have sufficient liquidity to withstand the stress of accelerated payments on bank bonds should there be future disruptions in the capital market. Fitch will monitor management's efforts to reduce the amount of variable rate debt outstanding, maintain adequate credit/liquidity facilities, and manage risks on interest rate swaps.
--Fitch will also monitor the PUC's willingness to approve sufficient and timely rate adjustments to allow PGW to build liquidity, fund capital projects, pay down debt, and meet rising health care and pension obligations.
PGW is a gas distribution utility owned by the city of Philadelphia. PGW is the largest municipally owned gas utility in the nation and provides for the acquisition, storage and distribution of gas to 518,000 customers within the city limits of Philadelphia. PGW is subject to regulation by the Pennsylvania Public Utilities Commission (PUC), which must approve the utility's rate increases.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Fitch Ratings, New York
Yvette M. Dennis, 212-908-0668
Christopher
Jumper, 212-908-0594
or
Media Relations:
Cindy Stoller,
212-908-0526
Email: cindy.stoller@fitchratings.com