NEW YORK--()--Fitch Ratings has affirmed the 'A-' long-term Issuer Default Rating (IDR) and outstanding debt ratings of Central Hudson Gas & Electric (CHG&E). At the same time, Fitch lowered CHG&E's short-term debt to 'F2' from 'F1'. The rating action on the short-term debt reflects Fitch's traditional linkage of long-term and short-term debt ratings, and is based on Fitch's report 'Short-Term Ratings Criteria for Non-Financial Corporates' dated Aug. 9, 2012. The Rating Outlook remains Stable. Approximately $466 million of outstanding long-term debt is affected by today's rating actions. The full list of rating actions is included at the end of the release.
KEY RATING DRIVERS
Cash Flow Stability
The ratings reflect the low business risk and predictable cash flows generated by CHG&E's regulated transmission and distribution businesses which bear no commodity price risk. CHG&E is in the third year of a three-year rate plan that expires June 30, 2013.
Balanced Regulatory Compact
CHG&E's cash flows are supported by a revenue decoupling mechanism that insulates the company from changes in sales volume due to weather, customer demand, and energy conservation and efficiency. The New York tariff structure uses forward-looking test years that better align revenue with projected operating costs.
Pending Parent Merger
Fitch does not expect the proposed acquisition of CH Energy Group, Inc. (CHG), CHG&E's parent company, by Fortis Inc., a Canadian distribution utility, to have any effect on CHG&E's ratings at this time. The acquisition will be funded with all cash, but Fitch expects no effect on the capital structure of CHG&E.
The merger agreement includes the following provisions that are supportive of CHG&E's credit quality and mitigate any potential bondholder loss: no cross default provision or restrictions on change of control, restrictions on dividend payments, and no financial guarantee on debt of Fortis and its affiliates.
Importantly, Fitch expects CHG&E's utility operations to continue to operate independently and to continue to manage its currently authorized 48% common equity ratio.
The main rating concern revolves around the ultimate amount of ratepayer benefits the New York Public Service Commission (NYPSC) will require CHG&E to provide for the merger to be approved.
CHG&E has proposed to freeze customer rates for the period July 1, 2013 to June 30, 2014, and to commit to synergy savings and other monetary benefits that amount to a total of approximately $20 million.
On Nov. 5, 2012, the NYPSC Staff, in its recommendation, supported a one-year rate freeze and requested that a total of $85 million be allocated for customer benefits.
In this scenario, Fitch models CHG&E's cash flow measures to weaken but remain supportive of the current rating category. Fitch forecasts FFO/interest to average 4.6x and FFO/debt, 21.2%, over the 2013-2015 time period. The weakening in FFO is also triggered by the expiration of bonus depreciation in 2012.
Fitch would expect pressure on the ratings in the event that the NYPSC approves the merger but imposes additional ratepayer benefits or multi-year rate freezes that would impair CHG&E from earning an adequate and timely return on its capital investments.
A decision by the NYPSC is expected in the first quarter of 2013.
Fitch does not expect the storm to have any significant long-term impact on CHG&E's infrastructure. CHG&E's service area, while affected, suffered significantly less damage than other areas of New York or New Jersey. Importantly, the NYPSC has allowed deferral and recovery of incremental storm costs in the past, which limits any impact on earnings.
Fitch considers CHG&E to have adequate liquidity to meet its short-term financing needs. The company has access to a $150 million bank credit facility that expires in October 2016. There were no borrowings outstanding under the facility as of Sept. 30, 2012. There was $0.2 million of cash on hand as of Sept. 30, 2012.
Debt maturities are manageable, with $30 million due in 2013 and $14 million due in 2014. Fitch expects CHG&E to refinance these debt obligations as they become due.
WHAT COULD TRIGGER A RATING ACTION
Positive Rating Actions
No positive rating action is anticipated in the near term.
Negative Rating Actions
--An unexpected deterioration in the New York regulatory compact.
--Merger treatment: greater than projected net customer benefits required from the NYPSC could have a significant impact on credit protection measures and trigger a rating action.
--A weakening in FFO/interest expense below 4.0x and FFO/debt below 16% could lead to a negative rating action.
Fitch has taken the following rating actions on CHG&E:
--Long-term IDR at affirmed at 'A-';
--Senior unsecured debt affirmed at 'A';
--Preferred stock affirmed at 'BBB+';
--Short-term debt downgraded to 'F2' from 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Short-Term Ratings Criteria for Non-Financial Corporates
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies