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 the New York State Energy Research and
Development Authority's (NYSERDA) issued debt of which BUG is the
obligor. The Rating Outlook for all entities is Stable. A complete list
of rating actions follows at the end of this release.
KEY RATING DRIVERS
Low-Risk Business Profile: KSE's natural gas distribution businesses in
New York provide relatively stable earnings and cash flows. BUG and KGE
represented approximately 33% and 22% of KSE's EBITDA, respectively, at
2015 year-end. The remainder is mainly provided by a long-term
contracted power generation business in Long Island and by the ownership
of two regulated natural gas utilities in Massachusetts.
The regulated utilities operate in relatively stable regulatory
frameworks with rate design features in New York jurisdiction that
include forward-looking test years, revenue decoupling and weather
normalization, a purchased gas adjustment (PGA) clause, and trackers for
large operating expenses. Even so, the implementation and continuation
of long-term base rate freezes at both BUG and KGE have weakened credit
metrics in recent years, and adequate rate relief will be key to
maintaining existing rating levels.
The Stable Outlook assumes all utilities continue to benefit from a cost
of gas recovery clause and cost control management.
Regulatory Risk: The utilities plan on filing rate cases in January 2016
for new rates to take effect in January 2017. Fitch believes the
upcoming rate filings will carry some level of regulatory uncertainty
following multi-year base rate freezes that have created a large balance
of unrecovered capital investments and higher operating costs. Moreover,
recently authorized returns on equity (ROEs) have generally been lower
than those currently allowed in the utilities' rate plans. Most recent
rate orders for New York gas utility peers delivered ROEs of 9%. BUG and
KGE currently operate under authorized ROEs of 9.4% and 9.8%,
respectively. A request for sizeable rate relief with the possibility of
ratepayer backlash is a credit concern. However, New York rate cases
have typically resulted in multi-year settlements in recent years,
providing gradual step-up increases which somewhat ease pressure on
customer bills.
Elevated Capex: Fitch projects consolidated capex to average near $1.2
billion annually over 2016-2019, with BUG expected to account for the
larger share of total capex. By comparison, KSE spent, on average,
approximately $750 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.
Stressed Credit Metrics: Consolidated FFO interest coverage and
FFO-adjusted leverage were 4.8x and 3.4x, respectively, at year-end
March 2015. Fitch expects cash flow coverage and leverage metrics to
weaken to approximately 3.8x and 4.5x, respectively, in 2017. The
inability to timely recover rising environmental remediation costs is a
key driver of the decline in financial ratios. Fitch projects credit
metrics to modestly improve post-2017 due to the benefit of balanced
rate relief at BUG and KGE.
BUG's FFO-based coverage and leverage metrics were 6.7x and 4.3x,
respectively, at year-end March 2015. Fitch projects FFO-fixed charge
coverage and FFO-adjusted leverage to weaken to 5.2x and 5.0x by 2017,
and improve to 5.5x and 4.6x, by 2019, assuming balanced rate relief in
future rate filings.
KGE's FFO-based coverage and leverage metrics were 5.2x and 3.8x,
respectively, at year-end March 2015. Fitch projects FFO-fixed charge
coverage and FFO-adjusted leverage to weaken near 4.2x and 5.3x by 2017,
and improve to 4.4x and 4.8x by 2019, assuming balanced rate relief in
future rate filings.
Ratings Linkage: Direct liquidity support from National Grid plc (NG;
'BBB' IDR/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 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 sufficient separation for KSE and
its subsidiaries to be rated on a stand-alone basis.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Base rate increases at BUG and KGE effective in 2017;
--Consolidated capex averaging near $1.2 billion annually over 2016-2019;
--O&M incremental growth in the 0%-2% range.
RATING SENSITIVITIES
KSE
Future developments that may, individually or collectively, lead to a
positive rating action:
Given the projected 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:
--Unfavorable outcomes in the utilities' future rate cases;
--FFO-adjusted leverage greater than 5x on a sustained basis.
BUG
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 next rate case;
--FFO-adjusted leverage greater than 5x on a sustained basis.
KGE
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 next rate case;
--FFO-adjusted leverage 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, 2015.
KSE had $21 million of consolidated cash and cash equivalents.
Additional liquidity is provided by the utilities' access to
inter-company money pools managed by NGUSA. KSE and NGUSA can only lend
into the money pools. At March 2015 year-end, consolidated net
borrowings (net of investments) were $829 million. Net borrowings at BUG
and KGE amounted to $276 million and $527 million, respectively.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
KSE
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+'.
KGE and 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-'.
The Rating Outlooks are Stable.
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 (pub. 05 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996267
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996267
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
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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.
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