DBRS Assigns Ratings to Duquesne Light Company

DBRS has today assigned an Issuer Rating of A (low) to Duquesne Light Company (DLC or the Company) and ratings of A (low) and Pfd-2 (low) to the Company’s First Mortgage Bonds and Preferred Stock, respectively, all with Stable trends. The assigned ratings are based on DLC’s reasonable credit metrics and relatively low business risk profile underpinned by stable regulated distribution/transmission businesses and a supportive regulatory environment in Pennsylvania. All of DLC’s earnings are now contributed by the low-risk distribution/transmission businesses following the approval of DLC’s new default service plan (effective June 1, 2013, to May 31, 2015), which includes the use of a supplier auction process to procure electricity for the Company’s residential customers, effectively eliminating price and volume risk.

Both the distribution and transmission businesses are regulated under a cost-of-service basis by the Pennsylvania Public Utility Commission and the Federal Energy Regulatory Commission (FERC), respectively. Under this framework, DLC is allowed to earn a reasonable return on equity (ROE) and recover prudent operating expenses and infrastructure investments on a timely basis, reducing regulatory lag (see Regulation section).

Regulation in Pennsylvania is viewed as supportive for DLC. The Company received approval of a distribution rate case settlement in 2010 that resulted in a revenue increase of $45.7 million. This was a black box settlement and there was no deemed equity thickness or ROE. Actual ROE in 2012 and Q1 2013 was approximately 10%. On August 2, 2013, DLC filed a general distribution rate application requesting an ROE of 11.25%, equity thickness of 51.8% and a revenue increase of $76.3 million.

The FERC allowed ROE and equity thickness for transmission is supportive with (1) allowed ROE of 11.4% for transmission, and (2) equity thicknesses of up to 59%.

The rating assumes that financial metrics will weaken, largely due to zero earnings contribution from the aforementioned provider-of-last resort business (approximately 14% of 2012 EBITDA) under the new default service plan and rising leverage. The Company expects to decrease its equity thickness to approximately 52% by April 30, 2015, to be in line with peers who recently completed their rate cases. An equity thickness greater than 50% is viewed as strong for the current ratings.

The ratings recognize that DLC is the primary source of cash to service the external debt of DLC’s parent, Duquesne Light Holdings, Inc. and a high level of capital spending on maintenance of distribution infrastructure. DBRS expects the Company to fund free cash flow deficits in a prudent manner and maintain its leverage at around 50%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.