Fitch Places Philadelphia Gas Works Sr Lien Revs on Watch Negative.
The 'BBB-' rating chiefly reflects Philadelphia Gas Works' (PGW) constrained liquidity position, which has not been significantly bolstered by improvements in collections of outstanding accounts receivable in fiscal 2004 and 2005. Fulfillment of operating commitments, including debt service, continues to rely heavily on external sources of liquidity. The Rating Watch Negative reflects Fitch's uncertainty that improved collection rates can be sustained during winter 2005-2006, given the anticipated large increase in monthly bills due to the increased cost of gas. Liquidity is projected to remain constrained during fiscal 2006, and the budget assumes a 94.5% collection rate, which is high compared to historical rates. A drop in collection rates could further exacerbate the liquidity problem, jeopardizing the system's ability to operate without seeking further outside sources of funding. The state-regulated public utility commission has demonstrated willingness to approve large increases in PGW's gas cost rate to offset the rising cost of the commodity, recently approving a 29% increase in the gas cost rate that will increase retail customer bills by an average of $335 a year.
Removal of the Negative Watch could be achieved by sustained improvement in revenue collection procedures to boost the utility's liquidity position. The passage of Act 201 provides PGW with tools to make solid improvements in this area. In addition, a strengthening of the city's weakened financial position (Philadelphia's GO bonds rated 'BBB+' with a Negative Outlook by Fitch) would be viewed favorably. Fitch believes that threats to sustained financial improvement include the high cost of gas coupled with the difficulties in implementing the Act 201 provision that allows the utility to shut off service to delinquent accounts during winter months, as well as the stressed financial position of the city. Fitch will continue to monitor the development of a recent proposal by the governor to transfer the utility to state authority and would view such a transfer favorably.
A major contributor to PGW's recent financial difficulties was a dramatic rise in accounts receivable. Following a substantial rate increase, net receivables jumped 39% to $93 million in fiscal 2003 and remained at $93 million in fiscal 2004. Due to improved collection efforts during fiscal 2005, accounts receivable declined somewhat to $85 million. The fiscal 2005 collection rate of 94.8% was much improved from a low 87% for fiscal 2003. Despite expanded gas shut-off capabilities, Fitch remains concerned that PGW will not meet collection rates assumed in the fiscal 2006 budget given the impact of rising commodity prices on monthly bills for a fairly low-income customer base. A decline in collections would further stress the utility's already constrained liquidity position.
Reflecting low revenue yield, PGW continues to rely heavily on external liquidity, including cash flow support from the city and an expanded $100 million commercial paper credit. The utility was able to renew its credit line in August 2005 for a 21 month period. PGW's owner, the City of Philadelphia, is likely to post a third consecutive year of accumulated general fund deficits in fiscal 2005, making it less able to support the utility as it has in the past. Nevertheless, the city has adopted a five year operating plan that defers a $45 million PGW loan repayment and grants back the utility's annual $18 million return on investment payment through fiscal 2009.
Debt service coverage declined somewhat in fiscal 2004 compared with fiscal 2003. Aggregate coverage, inclusive of all long-term debt, was 1.18 times (x) in fiscal 2004 compared with 1.28x in fiscal 2003. Combined coverage in fiscal 2005 is estimated to be 1.49x, based on 10 months of actual results. Fitch notes that coverage using the ordinance methodology is based on billed charges, or consumption, not on actual cash received. Fitch calculates that cash generated from operations in fiscal 2004 provided weak coverage of slightly less than 1.0x on all debt service obligations.
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|Date:||Oct 14, 2005|
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