NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Rating (IDR) for Rochester Gas & Electric Company (RGE) to 'BBB' from 'BBB-'. The rating Outlook has been revised to Stable from Positive. A full list of rating actions follows at the end of this press release.
The one-notch upgrade to RGE's IDR reflects robust and improved credit metrics. Fitch had previously highlighted Debt to EBITDA sustaining below 3.6x as a positive rating trigger. Fitch expects Debt to EBITDAR to remain below 3.5x over the forecast period (2014 - 2017) even as capital spending levels increase beginning 2015. In addition, favorable ratemaking features such as revenue decoupling, commodity pass-through mechanism and a forward test year, and effective ring-fencing from its parent company also support the assigned IDR. RGE is an indirect, wholly owned regulated subsidiary of Iberdrola USA, Inc. (IUSA: IDR rated 'BBB' with a Stable Outlook by Fitch).
KEY RATING DRIVERS
Robust Credit Metrics: Fitch expects RGE's EBITDA to improve over the forecast period driven by the regulator approved general rate increase. However, FFO is expected to lag the growth in EBITDA as benefits of bonus depreciation subside. Fitch expects Debt to EBITDAR ratio to average between 3.0x - 3.5x and FFO adjusted leverage to average 3.5 - 4.0x over the forecast period. These metrics are robust compared to Fitch's median-based guidelines for a low risk 'BBB' rated regulated utility.
Elevated Capital Expenditure: Fitch expects capital spending levels to increase beginning in 2015. RGE's plan presented to the New York state regulators includes $1.25 billion in infrastructure related investments through 2018. If approved, the plan will mandate an average spending of about $200 million annually through 2015 and $275 million annually for the remainder of the rating period (2016 - 2017). The proposed plan includes mandatory expenditure on transmission and distribution infrastructure, reliability and safety related improvements to RGE's networks. Fitch believes that the upcoming capital-spending plan is manageable without a significant strain on RGE's credit protection measures.
Near-term General Rate Case Likely: The last NYPSC approved general rate settlement was for a 40-month period that ended in December 2013 and authorized a 10% ROE for RGE. Embedded in Fitch's financial projections is an assumption that RGE files for a general rate increase for its electric and natural gas distribution businesses to recover NYPSC approved capital expenditures incurred since 2013 such that the new rates become effective in 2016. A constructive rate increase would help mitigate the pressure on credit metrics during a period of elevated construction program. Fitch's financial projections embed a lower than currently authorized ROEs consistent with a trend in the recent NYPSC utility rate case outcomes.
A Balanced Regulatory Environment: The ratemaking features of New York's regulatory framework; such as revenue decoupling, commodity pass-through mechanism, and a forward test year, supported a stable utility profile. Fitch views the risk of a material change in regulatory treatment or rate design features low, at least over the rating horizon.
Enhanced Regulatory Ring-fencing: The NYPSC imposed regulatory ring-fencing measures, through an October 2013 regulatory order approving IUSA's reorganization, are positive for RGE's credit-risk profile. The new ring-fencing measures require a minimum equity to capital ratio of 48%, limit dividend distributions under certain circumstances, and require RGE to maintain, at least, investment grade rating for its lowest rated debt. These provisions enhance RGE's credit profile and render the rating linkages weak between RGE and IUSA.
Sufficient Liquidity: RGE relies on bank revolving credit facilities, inter-company revolving credit facilities with IUSA, and an agreement with its affiliates, Central Maine Power Company (CMP) and New York State Electric & Gas Company (NYSEG), for using excess cash under certain circumstances. About $45 million was outstanding under the IUSA provided revolving credit facility. As of March 31, 2014, no debt was outstanding under other inter-company credit facilities and the excess cash agreement.
RGE jointly entered into a bank revolving credit facility (the Joint Facility) that allows maximum borrowings of up to $600 million in aggregate and expires in July 2017. Sub-limits under the Joint Facility apply to each of the joint borrower and can be altered within the constraints imposed by maximum limits that apply to each joint borrower. The maximum credit limit for RGE under the Joint Facility is $100 million. Nothing was outstanding under the Joint Facility at the end of March 2014.
In 2013 RGE became a party to an intercompany agreement along with CMP and NYSEG, under which each party to the agreement may lend to, or borrow from, the other parties, when the respective party has either a temporary cash surplus or short-term borrowing need. The agreement allows the parties to optimize their aggregate liquidity positions.
Parent Company Liquidity: IUSA (consolidated) liquidity as of March 31,
2014 was $1,138 million, and includes bank and inter-company revolving
credit facilities and $302 million in cash. Total amount available under
the revolving credit facilities was $836 million. $531 million available
under the revolving credit facilities was restricted to IUSA's regulated
operating subsidiaries. RGE has an intercompany credit facility under a
demand note agreement with IUSA that provides financing of up to $150
million and expires in 2018.
No Material Debt Maturities: Debt maturities over the rating horizon are minimal and RGE has sufficient liquidity to manage its short-term borrowings ($45 million) and 2016 debt maturities ($39 million).
Elevated capital spending over the rating horizon (2014 - 2017) and the upgrade of RGE's IDR to 'BBB' from 'BBB-' limit the possibility for a positive rating action in the near future. However, Fitch will take a positive rating action if the EBITDAR based leverage (adjusted debt/EBITDAR) declines to 3.3x or below on a sustainable basis.
Any deterioration in RGE's cash flow due to an adverse regulatory treatment of RGE's request to implement general rate case increase will lead to a negative rating action by Fitch. Fitch has relied on a balanced regulatory outcome in assigning the IDR. Fitch will also downgrade RGE if the EBITDAR based leverage increases to 4.0x or higher on a sustainable basis.
Fitch has upgraded the following ratings and revised the Outlook to Stable from Positive:
Rochester Gas & Electric Company:
--IDR to 'BBB' from 'BBB-';
--Senior secured debt to 'A-' from 'BBB+';
--Senior unsecured debt to 'BBB+' from 'BBB';
--Short-term IDR to 'F2' from 'F3';
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage