NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and debt ratings of Consolidated Edison Inc. (ED) and its regulated utility subsidiaries Consolidated Edison Company of New York, Inc. (CECONY), Orange & Rockland Utilities, Inc. (ORU), and Rockland Electric Co. (RECO).
Fitch has also affirmed the ratings of the New York State Energy Research and Development Authority's (NYSERDA) issued debt of which CECONY and ORU are the obligors.
The Rating Outlook for all entities is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Predictable Cash Flows: ED's credit profile is supported by the predictable cash flows of CECONY and sister utility ORU and the financial support it receives from them in the form of dividends for the payment of corporate expenses, dividends to common shareholders, and for other business matters. Fitch estimates the regulated utilities will contribute, on average, roughly 95% of consolidated EBITDA over 2016-2020 with the remainder provided by ED's competitive energy businesses and the electric and gas transmission operations of ED's wholly-owned subsidiary Con Edison Transmission, Inc. (CET).
Regulatory Visibility: The three-year joint proposal reached between CECONY and various intervenors would provide regulatory visibility through 2019. Under the proposed rate plan, CECONY would receive aggregate electric and gas base rate increases of $505 million and $177 million, respectively, over 2017-2019. CECONY's projected earnings and cash flows would further benefit from the expiration of a combined $89 million of temporary bill credits which were implemented under the existing rate plans. Fitch considers the rate outcomes reflected in the joint proposal to be balanced and in line with previous expectations. Further adding earnings and cash flow stability, ORU operates under a multi-year plan that provides regulatory predictability for the electric business through October 2017 and for the gas business through October 2018. The utility was granted a total of $67.3 million of rate relief over the next three years.
On a negative note, the 9% authorized ROE reflected in New York rate orders and as proposed in the joint proposal is significantly below the 9.6% ROE granted to utilities nationwide in 2015. However, the utilities enjoy several mechanisms that Fitch considers to be supportive of credit quality including forward-looking test years, multi-year rate plans, trackers for large operating expenses, and a revenue decoupling mechanism that isolates net margins from variations in retail sales. Those mechanisms do support the utilities' financial stability in the long term. A final decision by the New York State Public Service Commission (NYSPSC) is expected by year-end 2016.
Manageable JV Investment: Fitch considers ED's purchase of a 50% ownership interest in a midstream joint venture (JV) with Crestwood Equity Partners LP (Crestwood) as largely manageable within ED's existing credit profile. ED made cash contribution of $975 million for its ownership interest which was funded with a balanced mix of debt and equity. The JV will own and develop Crestwood's three existing natural gas pipelines and four storage facilities located in northern Pennsylvania and southern New York, well situated within the core of the Northeast Pennsylvania Marcellus shale gas-rich supply area. The JV builds upon ED's acquisition of a 12.5% ownership interest in the Mountain Valley Pipeline project in early 2016, and provides opportunities for additional growth with management's expectation of several infrastructure expansion projects in the Northeast region coming online by 2022. These projects will directly benefit ED as one of the shippers on the pipelines.
Given the modest scope of the initial JV investment, with cash distributions projected to contribute approximately 2% of ED's consolidated EBITDA on average, and JV acquisition debt representing approximately 3% of consolidated debt at year-end 2015, Fitch considers the impact of the transaction on ED's financial profile to be marginal. Importantly, parent-level debt is projected to remain within manageable levels in the low 10% of the consolidated capital structure.
Potential concerns around ED's expansion into midstream are somewhat offset by the nature of Crestwood's contracted assets with approximately 93% of revenue generated from stable, take-or-pay contracts with relatively moderate re-contracting risk and limited volume risk. However, Fitch has concerns about counterparty credit risk. Fitch estimates approximately 50%-60% of revenue is driven by E&P customers, including a mix of investment-grade and high-yield names. Two of the top three pipeline customers are rated below investment-grade by Fitch with the pipeline segment representing close to half of total JV revenue. Cash flow distributions could be lower than anticipated in the event high-yield customers experience financial distress and cannot meet their capacity commitments.
Event Risk: Fitch is concerned with CECONY's cash flow exposure to potential regulatory fines associated with the East Harlem natural gas explosion. The NYSPSC is conducting an investigation of the accident to determine if the utility bears some responsibility. There is no established timeline for the NYSPSC to render its decision, and Fitch will continue to monitor the progress of the investigation. Any ratings impact will be based on the amount and timing of potential fines and civil lawsuits as well as insurance coverage.
On a positive note, CECONY resolved the contractor kickback investigation with the NYSPSC as the commission approved a joint proposal reached between the utility and multiple parties, requiring CECONY to credit $116 million to customers, and for the period 2017 to 2044, to not seek to recover from customers an aggregate $55 million relating to return on capex.
Elevated Capex: Management expects consolidated capex to amount to approximately $11.91 billion over 2016 - 2018, compared with approximately $8.79 billion over 2013 - 2015. Utility capex, representing approximately 79% of total spending over the forecast period, is earmarked primarily towards replacement of aged infrastructure, network reliability enhancement and heating oil-to-gas conversions of residential and commercial buildings in New York City, which the company projects will support peak gas growth of about 2.3% over the next five years. Capital investments associated with the 'Reforming the Energy Vision' (REV) initiative are projected to represent approximately 3% of total utility spending over the next three years and are earmarked primarily towards demand-side management projects and energy efficiency. Recovery of REV spending is to be reflected in base rates coupled with earnings adjustment mechanisms (EAMs) that provide utility incentives to achieve peak system reduction targets.
Remaining capex is earmarked towards investments in renewables and energy infrastructure projects, which is estimated to represent roughly 17% of consolidated capex, and electric transmission and gas pipeline projects at CET with 4% of total capex. Fitch expects ED to fund non-utility capex in a relatively conservative manner, using a balanced mix of internally generated cash flows, long-term debt, including non-recourse project level debt for renewable investments, and common equity.
Credit Metrics: Fitch projects consolidated FFO-fixed charge coverage ratio to average near 4.8x and adjusted debt/EBITDAR, 4x, over 2016-2020. FFO-adjusted leverage ratio is projected to average near 4.1x over the same time frame. For the LTM period ended June 30, 2016, ED's FFO-fixed charge coverage ratio was 5.4x, FFO adjusted leverage, 4.2x, and adjusted debt/EBITDAR 4.3x.
Fitch expects CECONY's credit metrics to remain relatively stable over the forecast period but with limited headroom at the current rating levels. Fitch forecasts CECONY's FFO-fixed charge coverage ratio to average near 4.8x, and adjusted debt/EBITDAR, 3.7x, over 2016-2020. FFO-adjusted leverage ratio is forecasted to average near 4x. For the LTM period ended June 30, 2016, FFO-fixed charge coverage was 5.6x, FFO-adjusted leverage, 4x, and adjusted debt/EBITDAR, 3.9x.
ORU's FFO-fixed charge coverage ratio is forecasted to average 5.3x, and adjusted debt/EBITDAR, 3.6x, over 2016-2020, comfortably in line with the 'BBB+' rating category. FFO-adjusted leverage ratio is forecasted to average near 3.6x over the same time frame. For the LTM period ended June 30, 2016, FFO-fixed charge coverage was 5.8x, FFO-adjusted leverage 3.3x, and adjusted debt/EBITDAR, 3.2x.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Base rate increase at CECONY effective in 2017 per the JP;
--ORU base rate increases as per the existing rate plan;
--Consolidated capex of $11.91 billion over 2016-2018;
--EBITDA adjusted for dividend distributions from the Crestwood JV;
--$300 million to $350 million of cash proceeds from divestitures of various businesses and assets.
RATING SENSITIVITIES
Consolidated Edison, Inc.
Future developments that may, individually or collectively lead to a positive rating action:
Given the limited headroom in credit metrics for the current rating category, no positive rating action is anticipated in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
--Given the strong financial ties, a downgrade at Consolidated Edison Co. of New York, Inc.;
--FFO adjusted leverage greater than 5x or adjusted debt/EBITDAR greater than 4.2x on a sustained basis;
--A more aggressive management strategy towards the unregulated businesses, including investments into more volume/commodity-price sensitive midstream operations, that leads to incremental parent leverage.
Consolidated Edison Co. of New York, Inc.
Future developments that may, individually or collectively, lead to a positive rating action:
Given the limited headroom in credit metrics for the current rating category, no positive rating action is anticipated in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
--A significant deterioration in the New York regulatory compact;
--An adverse outcome associated with the investigation of the East Harlem gas explosion that results in material fines and incremental leverage;
--FFO-adjusted leverage greater than 5x or adjusted debt/EBITDAR greater than 3.9x on a sustained basis.
Orange & Rockland Utilities, Inc. and Rockland Electric Co.
Future developments that may, individually or collectively, lead to a positive rating action:
--An upgrade of ED.
Future developments that may, individually or collectively, lead to a negative rating action:
--A downgrade of ED;
--FFO-adjusted leverage greater than 5x or adjusted debt/EBITDAR greater than 3.9x on a sustained basis.
LIQUIDITY
Group liquidity is supported by a $2.25 billion shared bank credit facility that expires in October 2017. At June 30, 2016, there was $2,402 million of available consolidated liquidity, including $1,540 million of unused facilities and $862 million of cash and cash equivalents. Consolidated debt maturities are considered manageable with $725 million due in 2016, none due in 2017, and $1,250 million due in 2018.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Consolidated Edison, Inc.
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured debt at 'BBB+'.
Consolidated Edison Co. of New York, Inc.
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured debt at 'A-';
--NYSERDA issues relating to CECONY projects at 'A-'.
Orange & Rockland Utilities, Inc.
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured debt at 'A-'.
Rockland Electric Co.
--Long-term IDR at 'BBB+'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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