Moody's Investors Service Inc. is considering a lower credit rating for Potomac Electric Power Co.'s debt and preferred stock in the wake of rate decreases ordered by District and Maryland utility regulators.
About $1.3 billion worth of securities could be affected.
Moody's and other credit rating agencies such as Standard & Poor's rate stocks and bonds to reflect financial risk to investors. Pepco has held the highest credit rating, along with four other electric utilities, on its debt instruments. The rating has reflected Pepco's financial strength and has allowed the company to borrow money from banks and the general public at lower interest rates.
Pepco's rates recently were lowered by $18.2 million, or 3 percent, in the District and by $21.9 million, or 3.3 percent, in Maryland in response to lower corporate tax rates. The amount of profit Pepco can earn in Maryland also was lowered to reflect more favorable interest rates.
"Pepco has enjoyed lower financing costs as a result of our rating, and we will expect higher costs should our rating be lowered," said James Culp, vice president of investor relations at Pepco. "We are concerned about that because the ultimate result could mean higher cost for our customers."
Ultimately, utility customers pay the interest charges for capital borrowed by companies to build new power plants and for other projects through the rates they are charged.
Pepco's construction program is expected to total about $1.3 billion between 1987 and 1991. Pepco has an ongoing program to install new equipment and upgrade facilities, as well as plans to build a new power plant in the 1990s.
"Moody's believes the company will require moderate external financing and rate relief during the late 1980s," Moody's said in a statement. "Therefore, the rating agency expects the company's earnings . . . and cash flow to show moderate deterioration from current strong levels, in the absence of more constructive regulatory treatment over the next few years."
Under review by Moody's are the AAA ratings on Pepco's first mortgage and secured pollution-control revenue bonds and the AAA rating on its preferred stock. The provisional AA1 rating on preferred stock that Pepco notified the Securities and Exchange Commission that it plans to sell also is under review. Pepco's prime-1 rating for commercial paper is not under review because commercial paper is issued as a very short-term debt instrument and is not considered a potential problem by Moody's.
Standard & Poor's analyst Don Kaufer said that rating agency was not reviewing the company's debt instruments for possible downgrade because they were assigned a lower rate prior to regulatory actions in Maryland and the District. "Their AA rating is quite a good rating for them," he said.
Maryland People's Counsel John Glynn, who represents ratepayers before the Maryland Public Service Commission, said he was "confident" the credit rating agencies will choose not to downgrade Pepco's bond ratings. "We don't think the rate decrease is of a magnitude to affect their financial standing," he said. "They are a very, very sound utility."