November 10, 2016 - 5:41 PM EST
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Fitch Rates CECONY's $750MM Senior Unsecured Debentures 'A-'

Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company of New York, Inc.'s (CECONY) dual tranche issuance of $250 million 2.90% senior debentures series 2016B due Dec. 1, 2026 and $500 million 4.30% senior debentures series 2016C due Dec. 1, 2056. 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.

KEY RATING DRIVERS

Conservative Business Model: CECONY's 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. Various regulatory mechanisms support CECONY's long-term financial stability, including revenue decoupling, forward-looking test years, and trackers for large operating expenses.

Regulatory Visibility: The three-year joint proposal reached between CECONY and various intervenors would provide regulatory visibility through 2019. Under the proposed rate plan, CECONY would receive aggregate electric and gas base rate increases of $505 million and $177 million, respectively, over 2017 - 2019. CECONY's projected earnings and cash flows would further benefit from the expiration of a combined $89 million of temporary bill credits which were implemented under the existing rate plans. Fitch considers the rate outcomes reflected in the joint proposal to be balanced and in line with previous expectations.

On a negative note, the 9% authorized ROE reflected in New York rate orders and as proposed in the joint proposal is significantly below the 9.6% ROE granted to utilities nationwide in 2015. However, 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 financial stability in the long term. A final decision by the New York State Public Service Commission (NYSPSC) is expected by year-end 2016.

Event Risk: Fitch is concerned with CECONY's cash flow exposure to potential regulatory fines associated with the East Harlem natural gas explosion. The NYSPSC is conducting an investigation of 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 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. As of Sept. 30, 2016, CECONY had a $96 million regulatory liability for the remaining amount to be credited to customers.

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 including advanced metering infrastructure, and heating oil-to-gas conversions of residential and commercial buildings in New York City, which the company projects will support peak gas growth of about 2.3% over the next five years.

Capital investments associated with the 'Reforming the Energy Vision' (REV) initiative are projected to represent approximately 3% of total utility spending over the next three years and are earmarked primarily towards demand-side management projects and energy efficiency. Recovery of REV spending is to be reflected in base rates coupled with earnings adjustment mechanisms (EAMs) that provide utility incentives to achieve peak system reduction targets. Fitch continues to view REV as neutral to CECONY's credit profile.

Stable Credit Metrics: Fitch expects CECONY's credit metrics to remain relatively stable over the forecast period but with limited headroom at the current rating levels. Fitch forecasts CECONY's FFO-fixed charge coverage ratio to average near 4.8x, and adjusted debt/EBITDAR, 3.7x, over 2016 - 2020. FFO-adjusted leverage ratio is forecasted to average near 4x. For the LTM period ended Sept. 30, 2016, FFO-fixed charge coverage was 5.7x, FFO-adjusted leverage, 3.5x, and adjusted debt/EBITDAR, 3.7x.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Base rate increase at CECONY effective in 2017 per the JP;

--No fine associated with the Harlem gas explosion;

--Capex of $8.85 billion over 2016-2018.

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, 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;

--An adverse outcome associated with the investigation of the East Harlem gas explosion that results in material fines and incremental leverage;

--FFO-adjusted leverage greater than 5x or adjusted debt/EBITDAR greater than 3.9x on a sustained basis.

Date of Relevant Rating Committee: [Oct. 25, 2016]

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014652

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https://www.fitchratings.com/regulatory

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Source: Business Wire (November 10, 2016 - 5:41 PM EST)

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