NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Issuer Default Ratings (IDRs) and individual debt ratings of KeySpan Corp. (KSE) and its subsidiaries Brooklyn Union Gas Co. (BUG) and KeySpan Gas East Corp. (KGE). Fitch has also affirmed the ratings of New York State Energy Research and Development Authority's (NYSERDA) issued debt of which BUG is the obligor.
Concurrently, Fitch has revised BUG's Rating Outlook to Negative from Stable. The Rating Outlook at KSE and KGE remains Stable.
The Negative Outlook at BUG reflects a financial profile that will continue to be pressured over the next two years despite the expected benefit of near-term rate relief stemming from the joint proposal entered into by BUG and KGE with multiple interveners. Under the terms of the joint proposal, BUG would receive base rate increases totalling approximately $362 million over calendar years 2017-2019. While the outcome is supportive of credit quality, the projected rate relief does not fully offset the negative financial effect of planned accelerated capex that Fitch anticipates will lead to higher leverage than previously expected. Fitch projects BUG's capex over 2017-2019 to be 30% to 40% higher and FFO leverage 50bps weaker on average, compared to prior estimates, pushing the ratio modestly above the 5x benchmark that is more consistent with a 'BBB' utility credit profile. BUG's ratings would likely be downgraded one notch if FFO leverage sustains above 5x beyond fiscal year-end 2018.
KEY RATING DRIVERS
Low-Risk Business Profile: KSE's ratings and Stable Outlook consider the low-risk business profile of its natural gas distribution utility businesses in New York that bear no commodity price risk. The New York regulatory compact features balanced tariff mechanisms, including revenue decoupling and weather normalization, forward-looking test years, and multi-year rate plans that provide regulatory predictability.
Balanced Joint Proposal: The terms of the three-year joint proposal are supportive of credit quality and in line with Fitch's previous expectations. BUG is to receive base rate increases totalling approximately $362 million, and KGE, a total of approximately $159 million, over calendar year 2017-2019, with new rates effective January 2017. Rate increases will be levelized over the three-year period to mitigate impact on customer bills. The joint proposal features a below national average 9% authorized ROE with a 48% common equity ratio. The low ROE is consistent with recent rate orders of New York utility peers. The joint proposal removes the regulatory uncertainty following multi-year base rate freezes that have created a large balance of unrecovered capital investments and higher operating costs. In addition, it features credit-supportive mechanisms including the use of surcharges for environmental costs and pipeline replacement costs that enhance timely cash recovery.
Elevated Capex: Fitch projects consolidated capex to average approximately $1.3 billion annually over 2017-2020, with BUG expected to account for approximately 42% of total capital spending, and KGE, 28%. By comparison, KSE spent, on average, approximately $880 million of capex annually over the prior four years. Capital spending primarily targets replacement of aging infrastructure including main replacement of leak-prone pipe, enhancement of network reliability, and gas growth projects including heating-oil-to-gas conversions of residential and commercial buildings in New York. Fitch expects the utilities to fund capex in a manner consistent with their authorized regulatory capital structures and does not assume any parent cash infusions to support utility capital spending.
Credit Metrics: KSE's consolidated credit metrics are adequate but have limited headroom at the current rating category. Fitch estimates consolidated FFO coverage and leverage ratios to average near 4x and 4.8x, respectively, over the forecast period. Consolidated coverage and leverage ratios were 3.2x and 4.9x, respectively, at fiscal year-end March 2016.
Fitch projects BUG's FFO leverage ratio to be weak for the current rating category and average 5.3x. The projected metrics are weaker than previous expectations due to the higher capex and associated debt funding. Fitch estimates capex to be greater than $2 billion compared with roughly $1.5 billion in past estimates. FFO coverage ratio is forecasted to average 5x.
KGE's FFO coverage and leverage ratios are forecasted to average 4.5x and 4.8x, respectively, over the forecast period. The ratios have limited headroom for the current rating category. Like BUG, KGE's credit ratios are pressured by the accelerated capex and incremental debt funding that the projected multi-year rate relief does not fully compensate for. However, KGE's ratios have slightly more headroom than BUG's at the current rating level and are relatively in line with previous projections, supporting the ratings affirmation and Stable Outlook.
Parent-Subsidiary Rating Linkage: Direct liquidity support from National Grid plc (NG; IDR 'BBB'/Stable Outlook), KSE's ultimate parent company, and National Grid USA, Inc. (NGUSA; not rated by Fitch), KSE's direct parent company, creates a moderate-to-strong level of rating linkage between the IDRs of KSE and its subsidiaries and NG. However, ring-fencing measures including authorized regulatory capital structures, dividend payment restrictions, and absence of an operational overlap between the New York subsidiaries and the rest of the NG group provide some layer of protection from potential financial contagion due to NG ownership. At KSE's current rating level, Fitch would consider a maximum one-notch differential between the IDRs of KSE and NG.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Rate base growth as stipulated in joint proposal with base rate increases effective January 2017;
--Consolidated capex averaging near $1.3 billion annually over 2017-2020;
--O&M growth rate in line with inflation levels;
--No dividend payments.
RATING SENSITIVITIES
KSE
Future developments that may, individually or collectively, lead to a positive rating action:
Given the limited headroom at the current rating level and elevated capex, a positive rating action is unlikely in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
FFO leverage ratio between 5x-5.2x on a sustained basis.
BUG
Future developments that may, individually or collectively, lead to a Stable Outlook:
Cost containment measures that result in FFO leverage ratio to maintain below 5x on a sustained basis.
Future developments that may, individually or collectively, lead to a negative rating action:
FFO leverage ratio greater than 5x beyond fiscal year-end 2018 would trigger a one-notch downgrade.
KGE
Given the limited headroom at the current rating level and elevated capex, a positive rating action is unlikely in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
FFO leverage ratio greater than 5x on a sustained basis.
LIQUIDITY
Fitch considers liquidity to be adequate. NG had approximately $4.4 billion in syndicated and revolving credit facilities at March 31, 2016. KSE had $22 million of consolidated cash and cash equivalents. Additional liquidity is provided by the utilities' access to the inter-company regulated money pool managed by NGUSA. The pool provides about $3 billion in total liquidity. KSE and NGUSA can only lend into the regulated money pool. At March 2016 fiscal year-end, BUG had no net money pool borrowings and KGE had net money pool borrowings (net of investments) of $379 million.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
KSE
--Long-Term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
KGE
--Long-Term IDR at 'BBB+';
--Senior unsecured debt at 'A-'.
Fitch has affirmed the following ratings and revised the Outlook to Negative from Stable:
BUG
--Long-Term IDR at 'BBB+';
--Senior unsecured debt at 'A-'.
New York State Energy Research and Development Authority (NYSERDA) (Brooklyn Union Gas Projects)
--Gas Facility revenue bonds at 'A-'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016179
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016179
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.