Fitch Affirms KeySpan Corp. and Subsidiaries' Ratings; Outlooks Stable
NEW YORK -- October 11, 2012
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
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
POSITIVE RATING TRIGGERS
--Parent and subsidiary rating linkage limits positive rating action at this
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
Fitch has affirmed the following:
--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.
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 available and related research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
--'Recovery Ratings and Notching Criteria for Utilities' (May 13, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
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