Business & Finance
Business and Finance
Business and Finance
Wed, October 26, 2011
Tue, October 25, 2011 Fitch Affirms Ratings of ConEd and Subs at 'BBB+';; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and debt ratings of Consolidated Edison Inc. (NYSE: ED) and its subsidiaries Consolidated Edison Company of New York, Inc. (CECONY), Orange & Rockland Utilities, Inc. (ORU), and Rockland Electric Company (RECO). Fitch has also affirmed the ratings for debt instruments issued by the New York State Energy Research and Development Authority (NYSERDA) for CECONY and ORU's Projects. The Rating Outlook for all entities is Stable. Approximately $10.8 billion of debt is affected by today's rating actions. The full list of rating actions is included at the end of the release.
ED's ratings affirmation reflects the stable and predictable cash flows generated by its low-risk regulated transmission and distribution (T&D) utility subsidiaries, CECONY, ORU and RECO. ED's cash flows are generated almost entirely by CECONY, which accounted for approximately 91% of consolidated EBITDA, while ORU accounted for 5% for the latest 12-month period (LTM) period ended June 30, 2011. ED has minimal exposure to its non-regulated competitive energy businesses, which represented 4% of consolidated EBITDA for the LTM period ended June 30, 2011.
The stability of the utilities' operating cash flow is supported by constructive regulatory mechanisms in each of CECONY and ORUs' service jurisdictions, including timely and full recovery of commodity cost of fuel and purchased power expenses. The tariff structure is favorable with the use of forward-looking test years and the inclusion in each of CECONY and ORU's New York service territories of a revenue decoupling mechanism which isolates the utilities from margin fluctuations due to changes in sales and weather.
CECONY's electric and gas businesses currently operate under three-year rate agreements that expire in March 2013 and September 2013, respectively. The multi-year base rate increases are based on returns on equity (ROEs) of 10.15% and 9.6%, respectively, each with a 48% common equity ratio. ORU received an electric base rate increase in its New York service territory of $26.6 million, effective July 1, 2011, based on a 9.2% ROE and a 48% common equity ratio. Subsequently, ORU filed a request for a rate increase of $17.7 million, to be effective July 2012.
Fitch believes ED's liquidity is strong with access to $1 billion available under a $2.205 billion bank credit facility that expires in June 2012. ED's parent-only debt is minimal, at 3% of consolidated debt at June 30, 2011, and debt maturities are manageable with the next maturity at CECONY of $300 million in 2012. Capital investments at the utilities are projected to average approximately $1.9 billion over the next five years, and Fitch expects them to be funded with a balanced mix of debt and equity.
Fitch expects ED's credit measures to remain solid throughout the forecast period. For the LTM ended June 30, 2011, consolidated funds from operations (FFO) + interest/interest ratio stood at 5.8 times (x) and FFO/debt at 27.7%. Fitch forecasts FFO coverage ratios to stand at 5.0x, 4.9x, and 4.4x in 2011, 2012, and 2013, respectively. Fitch forecasts FFO/debt to stand at 23.7%, 22.4%, and 19.2% in the same time period. Strong cash flow measures primarily result from the benefit of bonus depreciation in 2011 and 2012.
Fitch's ratings recognize 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 subject to sudden breakdown. Failure to maintain adequate levels of service can lead to customer dissatisfaction, reputation risk, and regulatory fines or penalties.
The ratings consider the potential cash flow exposure stemming from the NYPSC's prudence review of capital expenditures incurred by CECONY in its investigation related to the arrests of former employees for accepting kickbacks from contractors. As of June 30, 2011, CECONY had collected an estimated $681 million from ratepayers, which is subject to potential refund. While Fitch cannot predict the final outcome of this prudence review, Fitch does not anticipate CECONY to incur any material disallowance.
Cash flow exposure also relates to ED's pending case in tax court disputing the IRS disallowance of deductions of $499 million recorded during the 1998-2009 period from cross-border lease investments made by its non-utility business. An adverse outcome on the case would expose the company to payments estimated at $229 million, plus interest of up to $82 million as of June 30, 2011. Fitch does not expect disallowance due to the favorable court decision on deductions for the years prior to 1998.
The Stable Outlook for ED assumes that the utilities will continue to benefit from timely recovery of all commodity costs of fuel, electric power and capacity purchased on behalf of consumers. The Stable Outlook also assumes CECONY and ORU will continue to benefit from revenue decoupling for the electric and gas businesses.
Fitch has affirmed the following ratings:
ED
---Long-term IDR at 'BBB+';
-- Short-term IDR at 'F2';
-- Commercial Paper at 'F2'.
CECONY
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior Unsecured Debt at 'A-';
--Preferred Stock at 'BBB'.
ORU
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior Unsecured Debt at 'A-'.
RECO
--Long-term IDR at 'BBB+'.
NYSERDA
--Issues relating to CECONY projects at 'A-';
--Issues relating to ORU projects at 'A-'.
Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449 ]
Rating North American Utilities, Power, Gas, and Water Companies
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
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