TEXT-Fitch rates Delmarva Power & Light mortgage bonds 'A'
June 22 - Fitch Ratings has assigned an 'A' rating to Delmarva Power & Light Company's (Delmarva) issuance of $250 million of 4%, secured first mortgage bonds due in 2042. The Rating Outlook is Stable. Net proceeds from the offering will be used for general corporate purposes including repayment of approximately $215 million of commercial paper outstanding and redemption of $31 million of tax exempt debt. Delmarva typically issues commercial paper to temporarily finance ongoing capital investment (capex) projects. Delmarva's ratings reflect: --Stable and predictable cash flows generated from its regulated electric transmission and distribution and gas distribution businesses; --Constructive regulatory mechanisms with complete pass-through of purchased power costs as well as tariff decoupling in Maryland which minimizes volumetric risks and expected decoupling in Delaware in 2013; --Manageable, albeit large, capex program primarily representing the in-service date postponement of the Mid-Atlantic Power Pathway (MAPP) transmission project from 2015 to the 2019 to 2021 time period; --Reliance on parent, Pepco Holdings, Inc. ('BBB' IDR, Stable Outlook) for equity to maintain the capital structure. General Rate Cases Delmarva filed Distribution Rate Cases in both Delaware and Maryland in December 2011 seeking revenues increases of $31.8 million and $25.2 million, respectively, based on an authorized Return on Equity of 10.75%. In both filings, Delmarva requested measures to reduce regulatory including fully forecasted test years and trackers for recovery of distribution reliability investments. The requests also include recovery of operating and capital costs from Hurricane Irene which struck the service territory in August 2011. Financial Results 2012 is off to a weak start reflecting one of the warmest heating seasons on record which affected all of Delmarva's business lines including electricity transmission and distribution, electricity supply, and natural gas distribution. Higher approved distribution and transmission tariffs as well as decoupling in Maryland offset some of the mild weather impact and Fitch expects earnings and leverage measures to remain stable in 2012 through 2014. Key credit measures, including EBITDA to Interest at approximately 5.0x and Debt to EBITDA at approximately 3.8x to 4.0x are forecasted through 2014. Capex Spending Despite the postponement in building the MAPP transmission project, Delmarva projects a still heavy capex budget of approximately $1.7 billion for the five-year period from 2012 to 2016. Capex includes regulated investments in transmission and system reliability projects as well as maintenance projects in its jurisdictions. Capex remains large relative to Delmarva's size as measured by the existing $1.6 billion total regulated rate base or shareholder's equity of $873 million. Delmarva will be reliant on external funding, including equity infusions from its parent, Pepco Holding, to maintain its capital structure. Catalysts For Future Rating Actions Inadequate return on investment and regulatory lag are the largest risks to bondholders. A downgrade could occur Debt to EBITDA rose above 4.2x. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria & Related Research: --'Corporate Rating Methodology' (Aug. 12, 2011); --'Recovery Ratings and Notching Criteria For Utilities' (May 3, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology Recovery Ratings and Notching Criteria for Utilities