NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company of New York's (CECONY) new $700 million issue of 3.95% senior debentures series 2013 A due March 1, 2043. The Rating Outlook is Stable. The new debentures will rank equally with CECONY's existing senior unsecured obligations. Net proceeds will be used for general corporate purposes, including repayment of short-term debt that was used to fund CECONY's February 2013 $500 million debt maturity.
KEY RATING DRIVERS
Low-Risk Business Profile
The ratings reflect the stable earnings and cash flows generated by CECONY's low-risk regulated transmission and distribution business. The company is in the final year of a three-year rate plan that expires March 31, 2013.
Balanced Regulatory Compact
CECONY's operating cash flows benefit from full and timely recovery of fuel and purchased power expenses. Importantly, the New York tariff structure features the use of forward-looking test years, and a revenue decoupling mechanism for both the electric and gas businesses that insulates earnings from changes in sales volume, weather, and energy efficiency and conservation.
Rate Case Filing and Storm Expenditures
In January 2013, CECONY filed for a one-year $375 million electric rate increase to be effective January 2014. The request for rate support is partly driven by the ongoing restoration costs incurred from Hurricane Sandy. In 2012, CECONY incurred $363 million of response and restoration costs, including $104 million of capital expenditures. Favorably, CECONY is allowed, under its regulatory plan, to establish a regulatory asset that provides for deferral and future recovery of storm-related costs from rate payers.
However, Fitch also recognizes New York utilities' responses and restoration efforts on hurricane Sandy have been heavily politicized and scrutinized, creating some level of regulatory risk that could impact the current rate proceeding. Unexpected disallowance of or inability to defer already-incurred costs could pressure CECONY's earnings and cash flows.
The rate request is also supported by CECONY's plan to invest approximately $1 billion over the next four years on storm hardening measures to strengthen critical infrastructure.
CECONY expects total capex to amount to approximately $4.107 billion over 2013-2014, an incremental $462 million compared to the company's previous pre-Sandy estimates. Fitch believes ongoing rate relief will be key to supporting funding needs and maintaining ratings at current levels.
Robust Credit Metrics
Fitch considers CECONY's credit protection measures to be solid for the current rating category, benefiting from tariff increases and bonus depreciation. For the year ended Dec. 31, 2012, EBITDA-to-interest and funds from operations (FFO)-to-interest were both 5.5x, and debt-to-EBITDA and FFO-to-debt were 3.4x and 23.8%, respectively. Fitch expects credit protection measures to weaken over the forecast period but remain adequate for the current rating category with FFO-to-interest to sustain above 4.0x and FFO-to-debt to be in the 18% to 20% range.
Fitch's expectations assume that CECONY incurs no material cash flow effect from the NYPSC's review of capex related to allegations of contractor kickbacks. At Dec. 31, 2012, the company had collected an estimated $1,103 million from customers subject to potential refund. In its most recent 10-K filing, CECONY stated that it anticipates exploring settlement negotiations with the NYPSC's staff to resolve this matter.
CECONY has access to a total of $2.25 billion under a bank credit facility that expires in October 2016. At Dec. 31, 2012, CECONY had $121 million of letters of credit outstanding under the credit facility, and $421 million of commercial paper outstanding. Cash and cash equivalents were $353 million. Debt maturities are considered manageable with $200 million due in 2013, $475 million due in 2014, and $350 million due in 2015. Fitch expects CECONY to continue to have ample access to capital markets to support funding needs and refinance debt.
Positive: Future developments that could lead to positive rating actions are not anticipated at this time.
Negative: Future developments that could lead to negative rating actions include:
--Adverse rate case decisions;
--Unexpected punitive outcome in the capex review of contractor kickbacks;
--FFO/Interest below 4.0x and FFO/debt below 18% on a sustained basis.
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).
Applicable Criteria and Related Research
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies