Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company
of New York, Inc.'s (CECONY) new 4.5% $650 million issue of senior
unsecured debentures due Dec. 1, 2045. 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.
CECONY's ratings are driven by predictable earnings from its regulated
electric and gas delivery businesses and a relatively stable regulatory
compact in New York. The ratings also recognize that credit metrics will
remain under pressure in the near term due to high levels of capex that
will require sizeable external financing and the extension of a base
rate freeze through 2016. Event risk from the pending investigation into
the East Harlem gas explosion continues to hang over CECONY's credit
profile, and is exacerbated by the National Transportation Safety
Board's (NTSB) findings that the utility was partly at fault in the
incident. Management believes insurance proceeds are sufficient to cover
its exposure, although Fitch has not been able to verify the extent of
the insurance coverage.
KEY RATING DRIVERS
Conservative Business Model: Consolidated Edison Co. of New York, Inc.'s
(CECONY) ratings reflect the predictable cash flows of its regulated
electric and gas delivery businesses, which benefit from full and timely
recovery of fuel and commodity costs. CECONY is the largest subsidiary
of parent company Consolidated Edison Inc. (ED), and represented
approximately 96% of consolidated EBITDA as of Sept. 30, 2015.
Relatively Restrictive Regulation: Authorized returns on equity (ROEs)
continue to be below national average, and an increasing use of
regulatory deferrals and rate freezes to limit pressure on customer
retail rates has somewhat constrained Fitch's view of New York
regulation. That being said, CECONY enjoys several mechanisms that Fitch
considers to be supportive of credit quality including forward-looking
test years, multi-year rate plans, trackers for large operating
expenses, and a revenue decoupling mechanism that isolates net margins
from variations in retail sales. Those mechanisms do support the
utility's long-term financial stability.
Base Rate Freeze Manageable: The 2015 rate order that extended a base
rate freeze one additional year through 2016 will pressure credit
metrics over the next two years but some mitigating factors lessen the
adverse effect on operating cash flows and help keep the utility in line
with the existing rating level, albeit at the lower range of the 'BBB+'
rating category.
CECONY will be allowed to continue the use of a revenue decoupling
mechanism and trackers that provide recovery of fuel, pension and
property tax expenses, and storm costs, including collection from
customers on an annual basis of $107 million related to Superstorm
Sandy. The rate order reflected an authorized ROE of 9%, which is
significantly below the national average and below the 9.2% ROE
authorized in CECONY's previous rate order. However, the 9% authorized
ROE is consistent with those received by utility peers Orange & Rockland
Utilities, Inc. and Central Hudson Gas & Electric in their recently
settled rate cases.
Pending Rate Case Filing: Management has announced publicly that it
intends to file a rate case in the first quarter of 2016 for new rates
that would become effective in early 2017. Given the prolonged rate
freeze, CECONY's rate request to recover spent capex could be sizeable,
and as a result, lead to heightened regulatory risk. Under Fitch's
rating case scenario that assumes CECONY operating under a 9% ROE over
2017-2019, the utility's credit ratios modestly improve from weaker
2015-2016 levels. Fitch's rating case also assumes that CECONY can
continue to effectively control O&M to support the financial profile.
Event Risk Rising: The NTSB's findings regarding the East Harlem natural
gas explosion increase the likelihood of regulatory fines that
ultimately could have an adverse ratings impact. The impact will be
based on the amount and timing of potential fines and civil lawsuits and
insurance coverage. The New York Public Service Commission (NYPSC) is
conducting its own investigation of the accident to determine if the
utility bears some responsibility. There is no established timeline for
the NYPSC to render its decision, and Fitch will monitor the progress of
the investigation.
The NTSB determined that the East Harlem natural gas explosion was
partly caused by a faulty plastic fusion on a pipe joint, which was
performed by a CECONY contractor in 2011. The explosion leveled two
buildings on Park Avenue, killed eight people, and injured more than 48.
Fitch recognizes the inherent operating and event risk in CECONY's
businesses, which operate in a highly concentrated urban service
territory with an aged infrastructure that is costly to maintain and is
prone to sudden breakdown. The company has been the subject of intense
public scrutiny, political backlash, and reputation risk associated with
other high-profile accidents in recent years, including the Manhattan
steam main rupture in 2007 where one person died and others were
injured, and about 90 related suits are currently pending against the
company. In the steam main rupture case, the NYPSC prevented CECONY from
recovering from ratepayers the operating, capital, and retirement costs
that originated from the incident, limited the recovery of insurance
premiums, and instructed the utility to set aside monies for future
customer benefits in lieu of imposing penalties. Fitch is unable to
predict whether the NYPSC's investigation of the East Harlem explosion
would result in a similar outcome.
On a positive note, CECONY reached a settlement, which Fitch views as
credit neutral, with various parties that resolves the contractor
kickback NYPSC investigation. Per the terms of a joint proposal (JP),
the utility will provide credits of $95.729 million, which is net of
$20.557 million that is already being passed through to retail
customers. CECONY will establish a regulatory liability with carrying
charges for the amount to be credited, which will be addressed in a
future NYPSC proceeding. Other provisions of the JP will result in
additional customer benefits of approximately $54.7 million to be
applied over several years. The JP is subject to NYPSC approval. Fitch's
rating case model reflects an outcome that is consistent with the JP.
REV Neutral to Credit Profile: Ongoing developments associated with the
implementation of the Reform the Energy Vision (REV) framework could
have some impact on future regulatory proceedings, but given the
relatively slow pace of implementation thus far, Fitch believes any
impact would likely be muted in CECONY's upcoming rate case. The REV
framework could lead to fundamental changes to rate design, including
extending the length of rate plans and revisiting the manner in which
New York utilities are allowed to recover capital investments.
Elevated Capex: Management expects capex to amount to approximately
$7.73 billion over 2015-2017, compared with approximately $6.09 billion
over the prior three years. Utility capital spending is earmarked
primarily towards replacement of aged infrastructure, enhancement of
network reliability including $251 million of investments in advanced
metering infrastructure that align with REV policy, and heating
oil-to-gas conversions of residential and commercial buildings in New
York City, which the company projects will support gas peak growth of
about 2.3% over the next five years. Fitch expects CECONY's internally
generated cash flows (after payment of common dividends) to support on
average between 60% and 70% of capital spending over the forecast period.
Pressured Credit Metrics: Fitch forecasts CECONY's funds from operations
(FFO)-fixed charge coverage ratio to average near 4.5x, and adjusted
debt/EBITDAR of 3.9x, over 2015-2019. FFO-adjusted leverage is
forecasted to average near 4.3x. On an latest 12 months (LTM) basis,
FFO-fixed charge coverage was 5.1x and FFO-adjusted leverage 4.0x. Given
the limited headroom in credit metrics, CECONY's ability to receive
balanced decisions in rate cases will be key to maintaining the current
ratings.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case include:
--Base rate increase effective in 2017 with a 9% assumed ROE;
--Customer refunds associated with the contractor kickback investigation
consistent with the JP;
--Capex of $7.73 billion over 2015-2017;
--No fine associated with the Harlem gas explosion.
RATING SENSITIVITIES
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 upcoming 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 decision in CECONY's next rate proceeding;
--An adverse outcome associated with the investigation of the East
Harlem gas explosion that results in material fines and increased
leverage;
--FFO-adjusted leverage at or greater than 5x on a sustained basis.
LIQUIDITY
Liquidity is supported by a $2.250 billion shared bank credit facility
that expires in October 2017. At Sept. 30, 2015, there was approximately
$1.64 billion of available liquidity to CECONY, including $1.59 billion
of unused facilities and $51 million of cash and cash equivalents.
Long-term debt maturities are considered manageable with $650 million
due in 2016 and $1.2 billion due in 2018.
Date of Relevant Rating Committee: Oct. 23, 2015.
Additional information is available on www.fitchratings.com.
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993945
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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