NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company of New York, Inc.'s (CECONY) new $550 million issue of senior unsecured debentures due June 15, 2046. 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
Pending Rate Case: Fitch assumes a relatively balanced outcome in CECONY's pending rate case, similar to recent decisions of New York utility peers. That said, given the prolonged rate freeze, CECONY's rate request to recover capex is somewhat sizeable, and as a result leads to heightened regulatory risk and public scrutiny. The utility filed for electric and gas base rate increases of $479.6 million and $158.9 million, respectively, to become effective in January 2017. Under Fitch's base case scenario that assumes CECONY operating under a 9% return on equity (ROE) over 2017-2019, the utility credit ratios modestly improve from weaker 2015-2016 levels. Fitch's base case also assumes that CECONY can effectively control O&M to support the financial profile.
Conservative Business Model: CECONY's ratings reflect the predictable cash flow of its regulated electric and gas delivery businesses, which benefit from full and timely recovery of fuel and commodity costs. Various regulatory mechanisms support CECONY's long-term financial stability, including revenue decoupling, forward-looking test years, and trackers for large operating expenses.
Event Risk: Fitch is concerned with CECONY's cash flow exposure to potential regulatory fines associated with the East Harlem natural gas explosion. The New York State Public Service Commission (NYSPSC) is conducting an investigation into the accident to determine if the utility bears some responsibility. There is no established timeline for the NYSPSC to render its decision, and Fitch will continue to monitor the progress of the investigation. Any ratings impact will be based on the amount and timing of potential fines and civil lawsuits as well as insurance coverage.
On a positive note, CECONY resolved the contractor kickback investigation with the NYSPSC, as the commission approved a joint proposal (JP) reached between the utility and multiple parties, requiring CECONY to credit $116 million to customers, and, for the period 2017 to 2044, to not seek to recover from customers an aggregate $55 million relating to return on capex. Fitch views the JP as credit neutral.
Elevated Capex: Management expects capex to amount to approximately $8.85 billion over 2016-2018, compared with approximately $6.70 billion over the prior three years. We project CECONY's internally generated cash flow to support on average 60%-70% of capex over the forecast period. Utility capex is earmarked primarily towards replacement of aged infrastructure, network reliability enhancement, and heating oil-to-gas conversions of residential and commercial buildings in New York City.
Pressured Credit Metrics: Fitch forecasts CECONY's FFO fixed-charge coverage to average near 4.5x and adjusted debt/EBITAR to approximate 3.9x over 2016-2019. FFO-adjusted leverage is expected to average near 4.3x. For the LTM 1Q16, adjusted debt/EBITDAR and FFO-adjusted leverage were 3.7x and 3.9x, respectively.
Fitch's key assumptions within the rating case include:
--CECONY base rate increase effective in 2017 with a 9% assumed ROE;
--No fine associated with the Harlem gas explosion;
--Capex of $8.85 billion over 2016-2018.
Future developments that may, individually or collectively, lead to a positive rating action:
Given the limited headroom in credit metrics for the current rating category and regulatory uncertainties related to the pending rate case and gas investigation, no positive rating action is anticipated in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
--A significant deterioration in the New York regulatory compact illustrated by an unfavorable outcome in the pending rate case;
--An adverse decision associated with the investigation of the East Harlem gas explosion that results in material fines and increased leverage;
--FFO-adjusted leverage weakening to 5x or greater on a sustained basis.
Date of Relevant Rating Committee: Oct. 23, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)