The Rating Outlook is Stable.
Outstanding 1975 general ordinance bonds are secured by a closed first lien on net revenues of the gas works utility. The 1998 general ordinance bonds are secured by net revenues of the gas works utility subordinate to the prior pledge of the 1975 general ordinance bonds.
KEY RATING DRIVERS
LARGE GAS DISTRIBUTION SYSTEM: PGW is the largest municipally-owned gas distribution utility in the nation, serving slightly more than 500,000 accounts located entirely within the
SATISFACTORY FINANCIAL PERFORMANCE: Financial metrics have remained at an acceptable level over the last several years, principally due to prior rate increases and sustained improvement in collection of billings. Fitch calculated debt service coverage has averaged a sound 1.5x over the prior three years while liquidity has remained in excess of 50 days of cash on hand.
REGULATION OF RATES:
REDUCED RELIANCE ON DEBT FUNDING: PGW's ability to generate positive cash flow after meeting debt service and transfer obligations in recent years has eliminated its historical reliance on short-term debt to fund operations. Debt levels remain elevated, but Fitch expects leverage ratios will continue to improve going forward, particularly given the recent implementation of an infrastructure surcharge dedicated to funding capital projects.
PRIORITY LIEN RECOGNIZED: The 'BBB+' rating on the 1975 general ordinance bonds reflects their priority lien in the flow of funds, which is closed to future bond issues, as well as the distinct separation between the 1975 and 1998 ordinances.
PENDING SALE OF PGW: Fitch believes the recently announced agreement to sell the
WEAKER CASH FLOW: Diminished cash flow, most likely as a result of slower collections, high bad debt expense, inadequate rate relief or lower usage, leading to additional leverage in excess of what is currently programmed into the current capital program would be viewed negatively.
LARGE DISTRIBUTION SYSTEM
PGW is the largest municipal gas distribution utility in the nation, providing natural gas through a diverse mix of supply arrangements as well as its own storage and natural gas liquefaction facilities. Ample storage capacity allows the system to procure and store a sizeable portion of its winter supply during the less expensive summer months.
CHALLENGING DEMOGRAPHICS COMPOUND HIGH RATES
The system's high rates, the city's challenging demographics and the state's regulation of gas rates continue to constrain PGW's operating flexibility. Residential rates are comparatively higher than all other gas distribution systems operating within the state due to historically weak collections and extensive utility-sponsored discount programs that benefit low-income customers. The city's poverty rate stands at 26%, twelfth-highest among the nation's 50 largest cities, and overall income levels approximate just 75% of the state and national averages. In addition, the city's
Approximately 95% of the system's 501,000 customer accounts are residential, with the balance comprised of commercial and industrial users. Positively, accounts receivable have shown considerable improvement in recent years and collection of billed revenues has averaged a more stable 96% since 2005. Collections prior to 2005 were significantly weaker.
Rates and charges of PGW are set by the Pennsylvania PUC. The PUC's ratemaking methodology is designed to ensure that PGW recovers its costs, meets its rate covenant of 1.5x coverage on senior and subordinate lien obligations, and continues to fund a required
PGW's most recent base rate filing was approved in
SOUND FINANCIAL PERFORMANCE
Financial metrics generated in more recent years are satisfactory for the given rating category and much improved relative to historical results, primarily due to more timely cost recovery and improved collections. Fitch calculated debt service coverage of both senior and subordinate lien obligations has averaged an acceptable 1.5x over the prior three fiscal years, compared to 1.1x between fiscals 2006 - 2009.
Unrestricted cash diminished some in fiscal 2012, but with 70 days of cash on hand, PGW's cash position remains adequate for the system's operating profile and sound for the given rating category. Moreover, the decline in unrestricted cash in fiscal 2012 was attributable primarily to management's prudent decision to reduce leverage by accelerating the repayment of approximately
PGW is also authorized, pursuant to a city ordinance, to issue up to
Leverage ratios are expected to remain elevated, although management's ongoing commitment to reducing its reliance on short-term and long-term financing to fund capital expenditures is a positive consideration. Despite some improvement in recent years, equity/capitalization (24.8%) remains weak, but not inconsistent with the given rating category. Fitch expects leverage ratios to incrementally improve going forward.
The current capital program covers fiscal years 2015-2020 and totals a manageable
PGW expects to use its commercial paper program to finance a portion of its capital program. The balance of planned spending will come from excess operating cash flow and existing reserves, including the drawdown of its
The recent imposition of a distribution system improvement charge (DSIC) that began
Additional information is available at 'www.fitchratings.com'.
--'U.S. Public Power Peer Study --
--'U.S. Public Power Peer Study Addendum -
--'U.S. Public Power Rating Criteria' (
U.S. Public Power Peer Study --
U.S. Public Power Peer Study Addendum -
U.S. Public Power Rating Criteria
Source: Fitch Ratings
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