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Fitch Affirms KeySpan & Subsidiaries IDRs at 'BBB+'; Outlook Stable

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 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.

Fitch Ratings
Philippe Beard, +1-212-908-0242
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Beicke, +1-212-908-0618
Director
or
Committee Chairperson
Robert Hornick, +1-212-908-0523
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (December 8, 2015 - 4:56 PM EST)

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