(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed the ratings for KeySpan Corp. (KSE) and subsidiary companies KeySpan Gas East Corp. (KGE) and Brooklyn Union Gas Co. (BUG). In addition, Fitch has affirmed the ratings for New York State Energy Research and Development Authority (NYSERDA) (Brooklyn Union Gas Projects). The Rating 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 its regulated operating subsidiaries; an improved debt profile supported by the substantial reduction in stand-alone parent company debt by $700 million to $1 billion 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 agreement having been reached for the renewal of an existing long-term Power Supply Agreement (PSA) with the Long Island Power Authority (LIPA) (IDR 'A'; Stable Outlook) which expires in 2013.
On Oct. 2, 2012 the company and LIPA announced that both parties had agreed to modify and extend the existing PSA for the purchase of up to 3,700 MW of generation produced by National Grid-owned generating facilities for a minimum period of 12 years. The agreement will need to be approved in the next several months by the New York State Attorney General, the New York State Office of the State 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 LIPA to achieve cost reductions through the retiring or repowering of older generation assets which will reduce energy costs and improve environmental performance.
The existing Management Services Agreement with LIPA will terminate effective Jan. 1, 2014. At present, Fitch does not expect there to be a material impact on financial metrics.
KGE AND BUG RATING RATIONALE
The rating affirmations of KGE and BUG are driven by strong utility financial metrics and balanced regulatory treatment in New York. Utility financial metrics are expected to remain in-line with Fitch guidelines for the rating category and risk 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 forecast by Fitch to drop from current levels of 35.2% at KGE and 29.4% at BUG by FYE March 31, 2014; however, forecasts levels remain strong relative to Fitch guidelines.
Consistent utility cash flow metrics are supported by the inclusion of regulatory risk mitigation mechanisms in utility rate designs including revenue decoupling, weather normalization and full and timely commodity cost recovery with monthly cost of gas adjustments. KGE and BUG are currently operating in the fifth year of five year distribution rate plans, expiring December 2012. With both utilities currently earning near or above the allowed return of 9.8%, Fitch anticipates new rate plans will not be filed with the New York Public Service Commission (PSC) in 2012 and distribution rates will remain frozen until the next rate filing. Earned returns above 10.5% are subject to an earnings sharing mechanism. Fitch views managing costs as a key determinant to maintaining credit quality.
PARENT & SUBSIDIARY RATING LINKAGE
The KSE, KGE and BUG ratings are driven by the application of Fitch's criteria entitled 'Parent and Subsidiary Rating Linkage', Aug. 8, 2012. All three of the issuers rely on their ultimate parent, National Grid plc, for liquidity support. Fitch considers that this degree of linkage limits the IDRs of all three entities to a maximum uplift to Grid's IDR. In Fitch's view, the standalone credit measures of KGE and BUG warrant a two notch uplift relative to their ultimate parent's IDR.
Sufficient Liquidity Support is provided by ultimate parent company National Grid plc. At FYE March 31, 2012, KSE parent company, National Grid USA (NR) had access to approximately $4.13 billion in total borrowing capacity, with no monies drawn. The primary sources of liquidity to National Grid USA include a $3 billion loan agreement with National Grid plc, on which KSE is a named borrower together with National Grid USA; an $850 million syndicated facility that expires in November 2015; and, a $280 million bilateral revolving facility that expires in July 2017. The $3 billion loan agreement with the ultimate parent is backed up by an adequate operational liquidity position at National Grid plc, including cash available, committed syndicated and bilateral revolving facilities with a combined approximate U.S. dollar value of $2.2 billion, in addition to CP and MTN programmes.
MODERATE FUNDING NEEDS
Capital spending levels are moderate and primarily allocated to general system maintenance in order to sustain system reliability. Debt maturities at the parent level are manageable, with $150 million due in 2013 and $108 million due in 2016. KGE and BUG have no debt maturities until 2016 when a $400 million note comes due at BUG and a $100 million note comes due at KGE. Fitch views access to the debt capital markets as unrestricted for KSE and its operating subsidiaries.
POSITIVE RATING TRIGGERS
--Parent and subsidiary rating linkage limits positive rating action at this time.
NEGATIVE RATING TRIGGERS
-- Negative rating developments at National Grid plc that could limit liquidity support to KSE or require KSE to upstream cash above current levels.
-- With rates frozen at BUG and KGE a failure to manage costs could weaken financial 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) (Brooklyn Union Gas Projects) --Gas facility revenue bonds at 'A'
The Rating Outlooks are Stable.
(Caryn Trokie, New York Ratings Unit)