Fitch Affirms Iberdrola USA and Regulated Sub.; Outlook Positive for Iberdrola USA and RGE

NEW YORK--()--Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of Iberdrola USA, Inc. (IUSA) and Rochester Gas & Electric Corporation (RGE) at 'BBB'. The Rating Outlook for each entity is revised to Positive from Stable. Fitch has also affirmed the IDRs of New York State Gas & Electric Corp. (NYSEG) and Central Maine Power Company (CMP) at 'BBB+' with a Stable Outlook. A full list of rating actions follows at the end of this press release.

The revision to IUSA's Outlook to Positive from Stable reflects Fitch's expectations of continued strong operating and financial performance at IUSA owned utilities, stable cash flow from its largely contracted renewable business, and manageable funding needs over the rating horizon. Fitch will upgrade IUSA's IDR to 'BBB+' from 'BBB' if its New York-based utilities receive constructive regulatory orders in general rate case applications management is expected to file in 2015 and if consolidated Fitch adjusted debt/EBITDAR is below 3.5x and funds from operations (FFO) fixed charge coverage above 5x, on a sustainable basis and as expected by Fitch.

The Positive Outlook for RGE reflects Fitch's expectation that the planned rate filing will allow the company to maintain its currently sound credit measures. Fitch will upgrade RGE's IDR to 'BBB+' if the adjusted debt/EBITDAR remains below 3.5x and FFO fixed charge coverage is maintained at approximately 5x once the new distribution rates are implemented in 2016. Historically, RGE's credit metrics have been stronger than its current IDR. Fitch expects adjusted debt to EBITDAR to remain below 3.5x over the forecast period (2015-2016) even as capital spending begins to increase in 2015.

KEY RATING DRIVERS

IUSA

Low-Risk Business Profile: IUSA's post reorganization credit profile remains low-risk with its ownership in regulated utilities operating in New York and Maine, contracted cash flows at its renewable business, and manageable capital needs to support the capex cycle at its operating companies. A balanced regulatory environment in Maine and New York and the constructive Federal Energy Regulatory Commission (FERC) regulated electric transmission business also support the ratings and low business risk profile.

A Constructive GRC Order in Maine: The recent Maine public utility commission (MPUC) rate order increasing distribution rates annually by $24.3 million is cash flow positive for CMP and IUSA. The approved GRC settlement also establishes a full revenue decoupling mechanism and implements a new recovery mechanism for incremental storm restoration costs, further reducing the regulatory lag.

Credit Protection Measures: Fitch adjusted debt/EBITDAR and FFO/fixed charge coverage ratios are expected to be strong. Fitch adjusted leverage includes an allocation of parent debt for the renewable business that was transferred to IUSA by, Iberdrola, S.A. (ISA; 'BBB+', Outlook Stable) without any associated debt. Fitch adjusted consolidated debt to EBITDAR based leverage at the end of 2016 is expected to range between 3.5x-3.7x.

Manageable Capex Cycle: Fitch's rating assumptions includes no additional debt at the IUSA level to fund capex at its regulated utilities or the renewable business. Fitch expects these elevated capital outflows will be funded by the operating subsidiaries with minimum contributions from IUSA. Average annual capex through 2016, under the management plan will be about $1 billion. The proposed plan includes mandatory expenditure on transmission and distribution infrastructure, reliability, and safety related improvements and will require regulatory approval before execution reducing the regulatory risk.

A Balanced Regulatory Environment: The ratemaking features in New York and Maine, and the FERC's regulatory framework support a stable utility profile. Risk of a material change in the regulatory frameworks or rate design features is low, in Fitch's view.

RGE:

Robust Credit Metrics: Fitch expects RGE's credit protection measures to remain strong, driven by its operating performance and the expected result of the general rate case application it plans to file in 2015 with the new distribution rates to be effective in 2016. Fitch expects adjusted debt to EBITDAR to average between 3.2x-3.6x over the forecast period even with the elevated capex in 2015 and 2016. As of Sept. 30, 2014, EBITDAR based leverage was 3.4x and the FFO fixed charge coverage ratio about 5x.

Elevated Capital Expenditure: RGE forecasts capital spending levels to increase beginning in 2015. RGE's capital plan presented to the New York State regulators includes about $900 million in infrastructure related investments through 2018. If approved, the plan will mandate spending of about $200 million in 2015 and about $240 million annually for the remainder of the plan years. The proposed plan includes mandatory expenditure on transmission and distribution infrastructure, reliability and safety related improvements to RGE's networks. Fitch believes that the capex plan is manageable and expects timely regulatory support without a significant strain on RGE's credit protection measures.

General Rate Case: The last NYPSC approved general rate settlement was for a 40-month period that ended in December 2013. Fitch's rating assumptions include recovery of capital expenditures incurred since 2013. Fitch assumed implementation of new distribution tariffs in the first half of 2016. Fitch's financial projections embed a lower than currently authorized return on equity (ROE) for RGE, consistent with the recent trend in NYPSC approved utility rate cases.

Balanced Regulatory Environment: The ratemaking features of New York's regulatory framework such as revenue decoupling, a commodity pass-through mechanism, and use of a forward test year support a stable utility profile. However, the allowed ROE in New York State is among the lowest in the U.S., affecting coverage measures and cash flows. Fitch views the risk of a material change in the regulatory environment or rate design features low, at least over the rating horizon.

Enhanced Regulatory Ring-fencing: The NYPSC imposed regulatory ring-fencing measures incorporated in the 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 (currently at 48%), limit dividend distributions under certain circumstances, and require RGE to maintain, at least an investment grade rating for its lowest rated debt. These provisions enhance RGE's credit profile and render the rating linkage between RGE and IUSA weak.

CMP

Stand-Alone Risk Profile: Fitch's rating of Central Maine Power Company (CMP) is based on a stand-alone credit assessment due to the strong ring-fencing measures imposed by the MPUC in approving IUSA's reorganization plan. The IDR reflects strong cash flow metrics supported by a balanced regulatory environment in Maine and a constructive FERC regulatory regime regulating a sizeable transmission rate base.

Constructive GRC Order: The recent MPUC order increasing distribution rates annually by $24.3 million is cash flow positive. The MPUC allowed CMP to increase its distribution rates by an average of 4.5%. The rate increase specified in the approved settlement is premised upon a 9.45% ROE (50% of the regulatory capital) and a 7.06% return on an average rate base valued at $782 million. The approved GRC settlement also establishes a full revenue decoupling mechanism and implements a new recovery mechanism for incremental storm restoration costs.

Solid Credit Protection Measures: CMP's credit protection measures have been solid for CMP's rating category ('BBB+') and based on Fitch's conservative rating model expected to remain strong at least through 2016. Implementation of new distribution tariffs should allow CMP to maintain its strong financial profile at least through 2016. Through the latest 12 months (LTM) Sept. 30, 2014, EBITDAR based adjusted leverage and FFO interest coverage ratios were 3.2x and 7.1x. Fitch's credit protection measure expectations for the assigned IDR are - adjusted debt to EBITDAR based leverage of 3.5x-3.6x and FFO to fixed charge ratio of 4.8x or better.

Balanced Capex Cycle: Management forecasts CMP will spend $675 million-$700 million in capex over next three years, averaging about $225 million annually. The proposed spending is in line with a normalized capex cycle at CMP. The proposed investment plan includes mandatory expenditures on transmission and distribution infrastructure, reliability, and safety related improvements to CMP's networks. Fitch believes that the upcoming capital-spending plan is manageable with appropriate regulatory support and without a significant strain on CMP's credit protection measures.

A Balanced Regulatory Environment: The ratemaking features of Maine's regulatory framework support a stable utility profile. In Fitch's opinion, the risk of a material change in regulatory treatment or rate design is low.

NYSEG

General Rate Case: The last NYPSC approved general rate settlement was for a 40-month period that ended in December 2013. Fitch's forecast model assumes new rates will become effective by the middle of 2016 and will support the elevated construction program and rising operating costs and a lower ROE in line with the recent trend in New York, but will allow NYSEG to sustain its credit profile.

Moderately Elevated Capex Cycle: Management projects moderately elevated capex through 2016. The plan presented to the New York State regulators includes about $1.1 billion in infrastructure related investments through 2018. If approved, the plan will mandate spending of about $230 million in 2015 and rising to about $260 million annually for the remainder of the cycle (2016-2018). The proposed plan includes mandatory expenditure on transmission and distribution infrastructure, reliability, and safety related improvements to NYSEG's networks. Fitch believes the capital spending plan is manageable, but will moderately strain NYSEG's credit protection measures.

Supportive Credit Protection Measures: NYSEG's credit protection measures of adjusted debt/EBITDAR and FFO fixed charge coverage have been solid and are expected to remain in line with the Fitch's median-based guidelines for a 'BBB+' IDR. Through LTM Sept. 30, 2014, adjusted debt to EBITDAR and FFO fixed charge coverage ratios were 3.4x and 6.6x, respectively. Over the next several years Fitch's expects adjusted debt to EBITDAR of about 3.5x and FFO fixed charge coverage ratio of 4.8x or better.

Strong Regulatory Ring-Fencing Measures: The NYPSC regulatory ring-fencing measures imposed through an October 2013 regulatory order approving IUSA's reorganization are positive for NYSEG's credit-risk profile. The new ring-fencing measures require a minimum equity to capital ratio, limit dividend distributions under certain circumstances, and require NYSEG to maintain, at least, investment grade rating for its lowest rated debt. These provisions lower business risk and enhance NYSEG's credit profile.

Balanced Regulatory Environment: The ratemaking features of New York's regulatory framework such as revenue decoupling, a commodity pass-through mechanism, and use of a forward test year support a stable utility profile. However, the allowed ROE in New York State is among the lowest in the U.S., affecting coverage measures and cash flows. Fitch views the risk of a material change in the regulatory environment or rate design features low, at least over the rating horizon.

Consolidated Liquidity: Consolidated liquidity at IUSA as of Dec. 4, 2014 was $1,362 million including bank and inter-company revolving credit facilities and $476 million in cash. Total amount available under the revolving credit facilities was $886 million of which $586 million was restricted to IUSA's regulated operating subsidiaries.

RATING SENSITIVITIES

IUSA

Positive: Fitch adjusted consolidated debt to EBITDAR ratio of 3.5x or less on a go forward basis.

Negative:

-- Failure to achieve, on a sustained basis, Fitch adjusted debt-to-EBITDAR of 4.3x on a consolidated basis;

-- A materially adverse regulatory outcome of the GRC application to be filed in 2015 in New York;

-- Any deterioration in credit measures that result from higher use of leverage or outsized return of capital to ISA.

RGE

Positive: Maintaining adjusted consolidated debt to EBITDAR no greater than 3.5x on a sustained basis.

Negative:

-- Failure to achieve, on a sustainable basis adjusted debt-to-EBITDAR of 4.3x; and

-- A materially adverse regulatory action on the GRC application to be filed in 2015 in New York.

NYSEG

Positive: Maintaining adjusted consolidated debt to EBITDAR ratio of 3.3x on a sustained basis.

Negative:

-- Failure to achieve on a sustainable basis adjusted debt-to-EBITDAR of 3.8x; and

-- A materially adverse regulatory outcome of the GRC application to be filed in 2015 in New York for NYSEG.

CMP

Positive: Maintaining adjusted consolidated debt to EBITDAR ratio of 3.3x on a sustainable basis.

Negative:

-- Failure to achieve, on a sustainable basis, adjusted debt-to-EBITDAR of 3.8x; and

-- A material negative regulatory action adversely affecting cash flows and credit protection measures.

Fitch has affirmed the following ratings and revised the Outlook to Positive from Stable:

Iberdrola USA, Inc.:

--IDR at 'BBB'; and

--Senior unsecured debt at 'BBB'.

Rochester Gas & Electric Company:

--IDR at 'BBB';

--Senior secured debt at 'A-';

--Senior unsecured debt at 'BBB+'; and

--Short-term IDR at 'F2'.

Fitch has affirmed the following ratings with a Stable Outlook:

Central Maine Power Company:

--IDR at 'BBB+';

--Senior secured debt at 'A';

--Senior unsecured debt at 'A-';

--Preferred Stock at 'BBB'; and

--Short-term IDR and commercial paper at 'F2'.

New York State Electric & Gas Corporation

--IDR at 'BBB+';

--Senior unsecured debt and revenue bonds at 'A-'; and

--Short-term IDR and commercial paper at 'F2.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958015

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Contacts

Fitch Ratings
Primary Analyst
Roshan Bains, +1-212-908-0211
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Roshan Bains, +1-212-908-0211
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com