Fitch Rates KeySpan Gas East $700MM Senior Unsecured Notes 'A-'

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to KeySpan Gas East Corp.'s (KGE) issuance of $700 million 2.742% senior notes due Aug. 15, 2026. The Rating Outlook is Stable. The new senior unsecured notes will rank equally with KGE's existing senior unsecured obligations. Net proceeds will be used for general corporate purposes.

KEY RATING DRIVERS

Low-Risk Business Profile: KGE's natural gas distribution business provides relatively stable earnings and cash flows. The company benefits from rate design features that include forward-looking test years, revenue decoupling and weather normalization, a purchased gas adjustment clause, and trackers for large operating expenses.

Pending Rate Case: Fitch assumes a relatively balanced outcome in KGE's pending rate case, similar to recent rate decisions of New York utility peers. However, the rate case does present a certain level of regulatory risk. KGE's base retail rates have been frozen since 2008, and, as a result, the rate request is sizable and could draw political and ratepayer scrutiny. Moreover, KGE's current authorized return on equity (ROE) of 9.8% is higher than most recently authorized ROEs. Most recent rate orders for New York gas utility peers delivered ROEs of 9.0%. However, New York rate cases have typically resulted in multiyear settlements in recent years, providing gradual step-up increases that somewhat ease pressure on customer bills.

KGE is seeking a $142 million base rate increase (average net customer bill increase equivalent of 12%) based on a 9.94% ROE and a 48% common equity ratio. Under an alternate proposal, KGE would settle for a multiyear plan based on a 10.44% ROE. New rates are expected to take effect from Jan. 1, 2017.

Elevated Capex: Fitch estimates capital spending to total $1 billion-$1.5 billion over 2016-2020. Projected capex primarily targets accelerated replacement of aging infrastructure, including main replacement of leak-prone pipe, enhancement of network reliability, and gas growth projects that include heating oil to gas conversions of residential and commercial buildings. The company plans to replace approximately 115 miles of leak-prone pipe annually. Timely recovery of projected capital spending will be critical to maintain a stable financial profile. Favorably, the $414 million capital tracker plan approved by the New York Public Service Commission in 2015 alleviates some of the credit concerns associated with capex recovery.

Stressed Credit Metrics: Fitch forecasts the ratios of FFO fixed-charge coverage and FFO-adjusted leverage to weaken to near 4.2x and 5.3x, respectively, by 2017, and improve to 4.4x and 4.8x by 2019, assuming balanced rate relief in future rate filings. KGE's FFO-based coverage and leverage metrics were 5.5x and 3.6x, respectively, at year-end March 2015.

Ratings Linkage: KGE relies on its ultimate parent, National Grid plc (NG; Issuer Default Rating [IDR] 'BBB' /Stable Outlook), a U.K. company, for liquidity support, creating a moderate level of rating linkage between the IDRs of KGE and NG. However, ring-fencing measures, including authorized regulatory capital structures, dividend payment restrictions, and absence of an operational overlap between KGE and the rest of the NG group provide sufficient separation for KGE to be rated on a stand-alone basis.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Base rate increase effective in 2017;

--O&M incremental growth in the 0%-2% range;

--Capex totaling $1 billion-$1.5 billion over 2016-2020.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action:

Given the near-term decline in forecasted credit metrics 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:

--An unfavorable rate order in the pending rate case;

--FFO-adjusted leverage greater than 5x on a sustained basis.

Date of Relevant Rating Committee: Dec. 7, 2015

Date of Relevant Rating Committee: Dec. 7, 2015

Summary of Financial Statement Adjustments

There were no financial statement adjustments made that were material to the rating rationale outlined above.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities - Effective from 5 March 2015 to 4 March 2016 (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009881

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.

Contacts

Fitch Ratings
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Beicke
Director
+1-212-908-0618
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
Hannah James, New York, + 1-646-582-4947
Email: hannah.james@fitchratings.com

Contacts

Fitch Ratings
Philippe Beard
Director
+1-212-908-0242
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Beicke
Director
+1-212-908-0618
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
Hannah James, New York, + 1-646-582-4947
Email: hannah.james@fitchratings.com