Fitch Downgrades KeySpan and its New York Utilities; Outlook Stable

NEW YORK--()--Fitch Ratings has downgraded the Issuer Default Ratings (IDR) of KeySpan Corporation (KSC) and those of its subsidiaries, Brooklyn Union Gas Company (BUG) and KeySpan Gas East Corporation (KGE), to 'BBB+' from 'A-'. The Rating Outlook for all entities is Stable. A full list of rating actions follows at the end of this release.

The downgrade to 'BBB+' from 'A-' reflects decline in credit protection measures at KSC and its New York based utility operating companies, BUG and KGE, and uncertainty around the timing and regulatory outcome of the next general rate case (GRC) application.

Credit protection measures for KSC, BUG, and KGE at the end of Financial Year 2013/14 were below Fitch's expectations. Delay in the GRC filing with the New York Public Service Commission (NYPSC) will not only accentuate the regulatory lag at BUG and KGE pressuring earned ROEs but also will likely result in a large rate increase request in the next retail tariff plan. For KGE, the last approved retail tariff plan expired at the end of 2012 and the retail tariff plan for BUG was extended by the regulators to the end of 2014, but without any additional cash flows.

In Fitch's view, management may be constrained in its strategy to shift capex and implement certain cost control measures to improve the unit cost of service and credit metrics due to the urgency to implement safety and reliability mandates and the time required to structurally lower costs.

KEY RATING DRIVERS:

GRC Filing Delay is Negative: Delay in the next GRC application filings for KGE and BUG with the NYPSC will continue to constrain credit protection measures, at least through FY 2016/17. The delay will likely push out the recovery of the concurrent and accumulated regulatory costs, in Fitch's opinion. With increased capital spending and rising operating costs, Fitch believes that the New York regulators may adopt measures that will spread increase in the retail rates over an extended period. Such a scenario will adversely affect cash flows and credit protection measures at BUG and KGE in the short-term.

Decline in Credit Metrics: A large capex cycle at KSC's New York utilities, postponement of GRC filing in New York, and any upstream dividends to the parent company will adversely affect KSC's credit protection measures over the rating horizon (2015-2017). Fitch also projects credit metrics for BUG and KGE to weaken over the rating horizon, driven primarily by the retail tariff freeze, increase in operating costs, and elevated capex that will be primarily financed with debt and internally generated cash flows.

KSC: Fitch projects that KSC's consolidate FFO-to-fixed charge coverage ratio will average about 4.0x and leverage based on consolidated EBITDAR (consolidated adjusted debt/consolidated EBITDAR) will remain around 4.0x over the rating horizon. For FYE March 31, 2014, consolidated FFO-fixed charge coverage ratio was 4.2x and leverage ratios based on EBITDAR and adjusted FFO (consolidated adjusted debt/consolidated FFO) were 5.0x and 3.7x respectively, with EBITDAR based leverage ratio moderately below Fitch's expectations for the assigned IDR.

BUG: Under Fitch's conservative rating case, adjusted debt/EBITDAR at the end of March 31, 2017, is expected to be around 4.5x. Similarly, FFO adjusted leverage is expected to be around 4.5x by the end of March 31, 2017. FFO based fixed charge coverage ratio over the rating horizon will average around 5.0x. Adjusted debt/EBITDAR at the end of March 31, 2014 for BUG was 4.2x and FFO-to-fixed charge ratio for the same period was 5.1x. Leverage ratio was modestly below Fitch's expectations for BUG's IDR.

KGE: Fitch forecasts KGE's adjusted debt/EBITDAR to be around 4.7x at the end of March 31, 2017. For the same period, Fitch projects KGE's FFO adjusted leverage ratio to be around 4.8x. Fitch's forecast for KGE's FFO based fixed-charge coverage ratio is about 5x. For FYE March 31, 2014, FFO-fixed charge coverage was 4.9x and the adjusted debt/EBITDAR ratio was 6.1x. EBITDAR based leverage was significantly below Fitch's assigned IDR.

Elevated Capex: Fitch forecasts elevated capex spending for BUG and KGE over the rating horizon. Due to the projected capex through March 2017 and a new retail tariff plan to be effective only by mid-2016, the credit metrics for the two utilities are expected to remain constrained in the short-term. Management expects consolidated capex to amount to average slightly over $1 billion a year over the rating horizon. By comparison, the consolidated capex for last three years averaged about $675 million.

Utility capital spending is primarily towards replacement of aging infrastructure, enhancement of network reliability, and system expansion, including heating oil to gas conversions of residential and commercial buildings in New York.

Adequate Liquidity: As of March 31, 2014, National Grid, which is the ultimate parent company of KSC, had about $4.1 billion in syndicated and revolving credit facilities. The consolidated cash balance at the end of March 31, 2014 at KSC was $191 million. Available liquidity is sufficient to meet funding needs over next 18 to 24 months. The syndicated back credit facility of $850 million will mature in 2015.

Modestly Balanced Regulatory Framework: Absence of any commodity price volatility risk and availability of revenue stabilization measures, i.e. decoupling, weather normalization, and monthly commodity cost adjustment, within New York's regulatory mechanism for gas distribution utilities lower BUG and KGE's cash flow volatility and provides stability to cash flows. Regulatory frameworks in New York and Massachusetts are balanced, in Fitch's opinion. Maturity of regulatory framework and provisions for timely recovery of costs and reasonable return on invested capital support the low-risk business profile of KSC's regulated businesses within these two jurisdictions.

Diversified operations: KSC's business profile benefits from geographic and business diversification. KSC operates regulated natural gas distribution business in Massachusetts and New York and has a long-term, contracted power generation business with clauses to pass-through commodity and environmental compliance costs. These segments provide sufficient cash flow diversity and stability.

IDR Not Notched from National Grid's IDR: Liquidity support from National Grid (NG 'BBB'/Outlook Stable) and National Grid USA, Inc. (NG USA, not rated by Fitch), and lack of standalone liquidity facilities at KSC and its operating companies create a moderate rating linkages between KSC and its subsidiaries' IDR and NG's IDR. However, the regulatory ring-fencing around BUG and KGE's capital structure, including regulatory limitations on the dividend pay-out and absence of an operational overlap between KGE, BUG, and other operating subsidiaries of NG USA and its intermediate holding subsidiaries provide sufficient separation for KSC and its operating companies to be rated on a standalone basis.

RATING SENSITIVITIES

Rating Upgrade Unlikely: Positive rating actions are unlikely given elevated large capital investment program at KSC's New York based regulated subsidiaries, BUG and KGE. Fitch believes that any material improvement in financial performance of KSC's cash flow over next two years is highly unlikely.

Negative Rating Action: Future developments that could lead to negative rating actions include:

For KSC:

--Adjusted debt/EBITDAR weakening to 3.75x-4.0x on a sustainable basis;

--A negative regulatory outcome in the prospective New York general rate case applications;

--Deterioration in the group's credit quality that results in reduced financial flexibility;

--Any major infrastructure safety related event in KSC's regulated subsidiary service territories.

For BUG and KGE:

--Adjusted debt to EBITDAR ratio weakening to 3.75x-4.0x on a sustainable basis;

--A large increase in the regulatory asset balance and/or a persistent lag in the utility's ability to earn authorized ROEs. In this regard, a constructive regulatory outcome in the next GRC filings at BUG and KGE is critical to maintain the ratings at the current rating level.

Fitch has downgraded the following ratings:

KSC

--Long-term IDR to 'BBB+' from 'A-';

--Senior unsecured debt to 'BBB+' from 'A-'.

KGE and BUG

--Long-term IDR to 'BBB+' from 'A-';

--Senior unsecured debt to 'A-' from 'A'.

New York State Energy Research and Development Authority (NYSERDA) (Brooklyn Union Gas Projects)

--Gas Facility revenue bonds to 'A-' from 'A'.

The Rating Outlooks are Stable

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=928615

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Contacts

Fitch Ratings
Primary Analyst
Roshan Bains, +1-212-908-0211
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Philippe Beard, +1-212-908-0242
Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Media Relations
Brian Bertsch, +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 St.
New York, NY 10004
or
Secondary Analyst
Philippe Beard, +1-212-908-0242
Director
or
Committee Chairperson
Glen Grabelsky, +1-212-908-0577
Managing Director
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com