NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company of New York's (CECONY) new 4.45% $850 million issue of senior unsecured debentures series 2014A due in 2044. 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 bearing interest at variable rates.
KEY RATING DRIVERS
The ratings reflect the stable earnings and cash flows generated by CECONY's low-risk regulated transmission and distribution business. CECONY's rate design includes full and timely recovery of fuel and commodity costs, forward-looking test years, multi-year rate plans and revenue decoupling.
The implementation of multi-year rate plans in CECONY's recently completed rate case provides cash flow visibility and regulatory predictability through 2015 for its electric business, and through 2016 for its gas and steam businesses. The electric rate plan stipulates a rate revenue reduction of $76 million effective January 2014 and a rate revenue increase of $126 million effective January 2015.
To mitigate the impact on ratepayers, the rate changes will be levelized at zero, essentially freezing CECONY's electric rates through 2015, and gas and steam rates through 2016. After 2016, absent another rate filing, base rates will be adjusted to account for the levelization. Fitch believes CECONY will be filing an electric rate case sometime in 2015 for new rates to be effective Jan. 1, 2016.
The rate order is more punitive than Fitch had previously modeled in its Base Case scenario. Nonetheless, Fitch projects EBITDA coverage and leverage metrics to remain adequate for the current rating category, with EBITDA/interest expense and debt/EBITDA averaging 5.5x and 3.6x, respectively, over the forecast period.
Fitch expects CECONY to implement aggressive cost control measures during the rate freeze period to maintain its financial profile. For the year ended Dec. 31, 2013, EBITDA/interest expense and debt/EBITDA were 5.7x and 3.6x, respectively. Longer term, CECONY's success in receiving a more balanced decision in its next rate case will also be critical towards maintaining the current ratings.
Fitch's expectations assume that CECONY incurs no material cash flow effect from the NYPSC's prudence review of certain expenditures following the arrest of employees related to allegations of contractor kickbacks. A New York Public Service Commission (NYPSC) consultant has estimated a potential total liability of $208 million for CECONY, which the company is disputing.
At Dec. 31, 2013, CECONY had booked a regulatory liability of $40 million, based on its own estimate of potential cash flow exposure. In its most recent 10-K filing, CECONY stated that it is exploring a settlement with the NYPSC's Staff to resolve this matter.
Management expects capex to amount to approximately $7.1 billion over the forecast period. Capital spending is earmarked towards replacement of aged infrastructure, enhancement of network reliability and system expansion, including heating oil to gas conversions of residential and commercial buildings in New York City.
Projected capex also includes a proposal to spend approximately $1 billion on storm hardening measures over the next four years. Fitch expects CECONY to finance capex using internally generated cash flows and issuances of long-term debt in a manner that is consistent with its authorized regulatory capital structure.
Liquidity is supported by a shared bank credit facility that expires in October 2017. CECONY has access to a total of $2.25 billion under the credit facility through October 2016, and from then, approximately $2.1 billion through October 2017. At Dec. 31, 2013, CECONY had $11 million of letters of credit outstanding under the credit facility, and $1,210 million of commercial paper outstanding. Cash and cash equivalents were $633 million.
Debt maturities are considered manageable with $275 million remaining due in 2014, $350 million due in 2015, and $650 million due in 2016. Fitch expects CECONY to continue to have ample access to debt capital markets to support capital spending needs and refinance long-term debt.
RATING SENSITIVITIES
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:
--Inability to effectively control operating costs during the rate freeze period;
--A sustained pattern of adverse rate case decisions;
--Unexpected punitive outcome in the prudence review of contractor kickbacks;
--Leverage metrics greater than 4x on a sustained basis.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2012).
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=715139
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Rating North American Utilities, Power, Gas, and Water Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822391
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