(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed the ratings for KeySpan Corp. (KSE) andsubsidiary companies KeySpan Gas East Corp. (KGE) and Brooklyn Union Gas Co.(BUG). In addition, Fitch has affirmed the ratings for New York State EnergyResearch and Development Authority (NYSERDA) (Brooklyn Union Gas Projects). TheRating Outlooks are Stable.
KEY RATING DRIVERS:
--Low operating risk due to regulated nature of gas distribution subsidiaries;
--Stable utility financial metrics;
--Balanced regulatory treatment;
--Parent and subsidiary rating linkage;
--Sufficient liquidity support by ultimate parent company, National Grid plc;
--Moderate capital funding and debt refinancing needs.
KSE RATING RATIONALE
The rating affirmation of KSE is driven by the low operating risk of itsregulated operating subsidiaries; an improved debt profile supported by thesubstantial reduction in stand-alone parent company debt by $700 million to $1billion in fiscal year end (FYE) March 31, 2011; moderate funding needs; and,sufficient liquidity support by ultimate parent company, National Grid plc (IDR'BBB' Stable Outlook by Fitch). The Stable Outlook also reflects an agreementhaving been reached for the renewal of an existing long-term Power SupplyAgreement (PSA) with the Long Island Power Authority (LIPA) (IDR 'A'; StableOutlook) which expires in 2013.
On Oct. 2, 2012 the company and LIPA announced that both parties had agreed tomodify and extend the existing PSA for the purchase of up to 3,700 MW ofgeneration produced by National Grid-owned generating facilities for a minimumperiod of 12 years. The agreement will need to be approved in the next severalmonths by the New York State Attorney General, the New York State Office of theState Comptroller and the FERC. The PSA will contain similar terms and pricing,at rates approved by the FERC. Included in the revised plan are options for LIPAto achieve cost reductions through the retiring or repowering of oldergeneration assets which will reduce energy costs and improve environmentalperformance.
The existing Management Services Agreement with LIPA will terminate effectiveJan. 1, 2014. At present, Fitch does not expect there to be a material impact onfinancial metrics.
KGE AND BUG RATING RATIONALE
The rating affirmations of KGE and BUG are driven by strong utility financialmetrics and balanced regulatory treatment in New York. Utility financial metricsare expected to remain in-line with Fitch guidelines for the rating category andrisk profile, with Fitch forecasts for EBITDA to Interest to remain above 6 x(times) through FYE March 31, 2014 at both KGE and BUG. FFO to debt is forecastby Fitch to drop from current levels of 35.2% at KGE and 29.4% at BUG by FYEMarch 31, 2014; however, forecasts levels remain strong relative to Fitchguidelines.
Consistent utility cash flow metrics are supported by the inclusion ofregulatory risk mitigation mechanisms in utility rate designs including revenuedecoupling, weather normalization and full and timely commodity cost recoverywith monthly cost of gas adjustments. KGE and BUG are currently operating in thefifth year of five year distribution rate plans, expiring December 2012. Withboth utilities currently earning near or above the allowed return of 9.8%, Fitchanticipates new rate plans will not be filed with the New York Public ServiceCommission (PSC) in 2012 and distribution rates will remain frozen until thenext rate filing. Earned returns above 10.5% are subject to an earnings sharingmechanism. Fitch views managing costs as a key determinant to maintaining creditquality.
PARENT & SUBSIDIARY RATING LINKAGE
The KSE, KGE and BUG ratings are driven by the application of Fitch's criteriaentitled 'Parent and Subsidiary Rating Linkage', Aug. 8, 2012. All three of theissuers rely on their ultimate parent, National Grid plc, for liquidity support.Fitch considers that this degree of linkage limits the IDRs of all threeentities to a maximum uplift to Grid's IDR. In Fitch's view, the standalonecredit measures of KGE and BUG warrant a two notch uplift relative to theirultimate parent's IDR.
Sufficient Liquidity Support is provided by ultimate parent company NationalGrid plc. At FYE March 31, 2012, KSE parent company, National Grid USA (NR) hadaccess to approximately $4.13 billion in total borrowing capacity, with nomonies drawn. The primary sources of liquidity to National Grid USA include a $3billion loan agreement with National Grid plc, on which KSE is a named borrowertogether with National Grid USA; an $850 million syndicated facility thatexpires in November 2015; and, a $280 million bilateral revolving facility thatexpires in July 2017. The $3 billion loan agreement with the ultimate parent isbacked up by an adequate operational liquidity position at National Grid plc,including cash available, committed syndicated and bilateral revolvingfacilities with a combined approximate U.S. dollar value of $2.2 billion, inaddition to CP and MTN programmes.
MODERATE FUNDING NEEDS
Capital spending levels are moderate and primarily allocated to general systemmaintenance in order to sustain system reliability. Debt maturities at theparent level are manageable, with $150 million due in 2013 and $108 million duein 2016. KGE and BUG have no debt maturities until 2016 when a $400 million notecomes due at BUG and a $100 million note comes due at KGE. Fitch views access tothe debt capital markets as unrestricted for KSE and its operating subsidiaries.
POSITIVE RATING TRIGGERS
--Parent and subsidiary rating linkage limits positive rating action at thistime.
NEGATIVE RATING TRIGGERS
-- Negative rating developments at National Grid plc that could limit liquiditysupport to KSE or require KSE to upstream cash above current levels.
-- With rates frozen at BUG and KGE a failure to manage costs could weakenfinancial metrics
Fitch has affirmed the following:
KSE--IDR at 'A-';--Senior unsecured debt at 'A-'.
--IDR at 'A-';--Senior unsecured debt at 'A'.
--IDR at 'A-'--Senior unsecured debt at 'A'
New York State Energy Research and Development Authority (NYSERDA) (BrooklynUnion Gas Projects)--Gas facility revenue bonds at 'A'
The Rating Outlooks are Stable.
(Caryn Trokie, New York Ratings Unit)