Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and debt
ratings of Consolidated Edison Inc. (NYSE: ED) and its subsidiaries
Consolidated Edison Company of New York, Inc. (CECONY), Orange &
Rockland Utilities, Inc. (ORU), and Rockland Electric Company (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. Approximately $11 billion of long-term debt is affected by
today's rating actions. A complete list of rating actions appears at the
end of this release.
KEY RATING DRIVERS
ED's rating affirmation is supported by the predictable earnings and
operating cash flows generated by its low-risk regulated transmission
and distribution utility subsidiaries, whose businesses operate in
relatively balanced regulatory frameworks that allow for full recovery
of fuel and commodity costs, forward-looking test years, multi-year rate
plans and revenue decoupling in New York.
ED's earnings and operating cash flows are derived almost entirely from
CECONY, which accounted for approximately 93% of consolidated EBITDA,
while ORU accounted for 6% for the latest 12-month (LTM) period ended
June 30, 2013. Consequently, ED's financial profile and credit quality
are strongly tied to the financial health and credit quality of CECONY.
ED's exposure to its non-regulated competitive energy businesses is
modest and has no impact on the credit profiles of ED and utility
subsidiaries at this time.
In January 2013, CECONY filed a rate case before the New York Public
Service Commission (NYPSC). The utility is requesting an electric rate
increase of $417 million, a gas rate increase of $27 million, and a
steam rate increase of $8 million, based on a 10.1% ROE and a 50% common
equity ratio. Increased operating and maintenance expenses and recovery
of capital investments, including approximately $242 million of deferred
restoration costs related to Hurricane Sandy, drive the rate request. A
decision by the NYPSC is expected in December 2013, with new rates
effective in January 2014.
Fitch's analysis reflects the perceived increased regulatory risk and
uncertainty associated with CECONY's pending rate case. The rate case
has been the subject of intense scrutiny and political backlash,
illustrated by Governor Cuomo publicly urging the NYPSC to reject
CECONY's request to increase rates. The utility's performance and
restoration efforts in the aftermath of Hurricane Sandy, when service to
approximately 1.4 million customers was interrupted over several days,
and the more recent service disruption to Metro-North train system, have
drawn negative publicity and renewed criticism of the utility. A new
provision in the Public Service Law has strengthened the NYPSC's
oversight and enforcement mechanisms to hold New York utilities more
accountable for poor operating performance and customer service.
Fitch's conservative Base Case scenario models that the utility receives
below 50% of its rate request and an authorized ROE below 10%,
consistent with the low authorized ROEs recently granted for other New
York utility peers. In that scenario, Fitch projects CECONY's 2014 funds
from operations (FFO)/interest and FFO/debt to be 4.7x and 18%,
respectively, slightly below Fitch's benchmark ratios for the current
rating category. ED's FFO/interest and FFO/debt are projected to be 4.9x
and 19.2%, in line with Fitch's target ratios for the 'BBB+' rating
category. Forecasted FFO-based metrics also reflect the expiration of
bonus depreciation and other tax credits that boosted cash flows over
recent years.
In the event that the rate decision is more punitive than assumed by
Fitch, 2014 leverage metrics would be more in line with benchmark ratios
for the 'BBB' rating category. However, Fitch would expect CECONY to
implement aggressive cost control measures if faced with such a
scenario, in order to maintain a stable credit profile.
Fitch believes the current rate proceeding is likely to result in a
one-year rate order, in which case management would file a new rate case
in 2014, for rates to take effect in January 2015. In that scenario,
Fitch projects CECONY's FFO/interest and FFO/debt to average 4.7x and
19.5%, respectively, over 2015-2017, while ED's FFO/interest and
FFO/debt are projected to average 4.8x and 19.9%, respectively, over the
same forecast period.
The Stable Outlook assumes a rate filing in 2014, with a balanced rate
decision in 2015 that would support the utility's projected peak capital
spending of approximately $4.4 billion over 2015-2016.
Conversely, a series of unfavorable rate decisions would strongly
suggest a deterioration of the New York regulatory compact, and could
affect all related entities due to strong linkages across the corporate
family.
Management expects consolidated capital expenditures to amount to
approximately $11.8 billion over the forecast period, including $10.3
billion, or 90% of total, at CECONY and $716 million, or 6% of total, at
ORU. Utility capital spending is earmarked primarily towards replacement
of aged infrastructure, enhancement of network reliability, and system
expansion, including heating oil to gas conversions of residential and
commercial buildings in New York City, which management projects will
support gas peak growth of 3.8% over the forecast period. Projected
capex also includes a proposal to spend approximately $1 billion on
storm hardening measures over 2013-2016.
Fitch expects ED's internally generated cash flows (after dividends) to
support on average between 70% and 80% of consolidated capital spending
over the forecast period, with the balance funded using the debt capital
markets.
Fitch considers consolidated liquidity to be solid. ED has access to $1
billion available under an approximately $2 billion shared bank credit
facility that expires in October 2017. As of June 30, 2013, there were
$1,434 million of consolidated borrowings outstanding, including
commercial paper borrowings, under the credit facility. There was $747
million of cash on hand. Fitch considers consolidated debt maturities to
be manageable, with $481 million due in 2014, $495 million due in 2015,
and $731 million due in 2016. Fitch expects the utilities to enjoy
adequate access to debt capital markets to refinance debt maturities.
On the legal front, ED's unwinding of its cross-border lease investments
(LILO) as part of the August 2013 IRS settlement regarding prior
disallowance of tax deductions, supports credit quality and alleviates
one of Fitch's prior rating concerns regarding ED's cash flow exposure
in this matter. The IRS had previously disallowed a total of $574.3
million of tax losses on audit of ED's 1997 through 2011 tax returns.
Management estimates the net negative cash flow impact from the LILO
decision to be less than $150 million.
Fitch's rating affirmation of ORU and RECO is based on projected credit
metrics that are solid for the current rating category. Fitch forecasts
FFO/interest to range between 5.0x and 5.5x, and FFO/debt to range
between 22% and 24% respectively, over the 2014-2017 forecast period.
For the latest 12 months ended June 30, 2013, FFO/interest and FFO/debt
were 4.7x and 21%, respectively.
ORU is operating under a three-year electric rate plan that stipulates
levelized rate base increases of $15.2 million effective July 1, 2012,
2013, and 2014. The plan includes an increasing authorized ROE, i.e.
9.4%, 9.5%, and 9.6% over the three-year period, which accounts for the
potential for interest rates to increase with an expanding economy.
Fitch projects ORU to earn its authorized ROE over the forecast period.
Fitch expects ORU's financial profile to further benefit from projected
tariff increases in the gas business and at subsidiaries RECO and Pike.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a
positive rating action:
Given current rating levels, no positive rating action is anticipated at
this time for ED and subsidiaries.
Future developments that may, individually or collectively, lead to a
negative rating action:
A significant deterioration in the New York regulatory compact,
reflected by a pattern of unfavorable rate orders, or the utilities'
inability to recover fuel and commodity costs on a timely basis, would
likely lead to negative rating actions across the corporate family.
A determination by Fitch that cash flow measures of FFO/interest above
4.0x and FFO/debt above 17% become unsustainable would likely lead to
negative rating actions.
Although not anticipated by Fitch, a significantly larger than expected
customer refund resulting from the NYPSC's investigation of CECONY's
prior contracting practices could pressure the credit profile and lead
to negative rating actions. As of June 30, 2013, a cumulative amount of
$1,246 billion previously collected in rates is subject to customer
refund. ED has publicly stated it is exploring a settlement with the
NYPSC Staff to resolve this matter, and that it expects any potential
refund to range between $16 million and $208 million.
Fitch has affirmed the following ratings with a Stable Outlook:
ED
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2'.
CECONY
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior Unsecured Debt at 'A-'.
ORU
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior Unsecured Debt at 'A-'.
RECO
--Long-term IDR at 'BBB+'.
NYSERDA
--Issues relating to CECONY projects at 'A-';
--Issues relating to ORU projects at 'A-'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May
16, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (July 27,
2012).
Applicable Criteria and Related Research:
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805713
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