Fitch Upgrades Rochester Gas & Electric Company's Ratings to 'BBB'; Outlook Stable

  Fitch Upgrades Rochester Gas & Electric Company's Ratings to 'BBB'; Outlook
  Stable

Business Wire

NEW YORK -- June 19, 2014

Fitch Ratings has upgraded the Issuer Default Rating (IDR) for Rochester Gas &
Electric Company (RGE) to 'BBB' from 'BBB-'. The rating Outlook has been
revised to Stable from Positive. A full list of rating actions follows at the
end of this press release.

The one-notch upgrade to RGE's IDR reflects robust and improved credit
metrics. Fitch had previously highlighted Debt to EBITDA sustaining below 3.6x
as a positive rating trigger. Fitch expects Debt to EBITDAR to remain below
3.5x over the forecast period (2014 - 2017) even as capital spending levels
increase beginning 2015. In addition, favorable ratemaking features such as
revenue decoupling, commodity pass-through mechanism and a forward test year,
and effective ring-fencing from its parent company also support the assigned
IDR. RGE is an indirect, wholly owned regulated subsidiary of Iberdrola USA,
Inc. (IUSA: IDR rated 'BBB' with a Stable Outlook by Fitch).

KEY RATING DRIVERS

Robust Credit Metrics: Fitch expects RGE's EBITDA to improve over the forecast
period driven by the regulator approved general rate increase. However, FFO is
expected to lag the growth in EBITDA as benefits of bonus depreciation
subside. Fitch expects Debt to EBITDAR ratio to average between 3.0x - 3.5x
and FFO adjusted leverage to average 3.5 - 4.0x over the forecast period.
These metrics are robust compared to Fitch's median-based guidelines for a low
risk 'BBB' rated regulated utility.

Elevated Capital Expenditure: Fitch expects capital spending levels to
increase beginning in 2015. RGE's plan presented to the New York state
regulators includes $1.25 billion in infrastructure related investments
through 2018. If approved, the plan will mandate an average spending of about
$200 million annually through 2015 and $275 million annually for the remainder
of the rating period (2016 - 2017). The proposed plan includes mandatory
expenditure on transmission and distribution infrastructure, reliability and
safety related improvements to RGE's networks. Fitch believes that the
upcoming capital-spending plan is manageable without a significant strain on
RGE's credit protection measures.

Near-term General Rate Case Likely: The last NYPSC approved general rate
settlement was for a 40-month period that ended in December 2013 and
authorized a 10% ROE for RGE. Embedded in Fitch's financial projections is an
assumption that RGE files for a general rate increase for its electric and
natural gas distribution businesses to recover NYPSC approved capital
expenditures incurred since 2013 such that the new rates become effective in
2016. A constructive rate increase would help mitigate the pressure on credit
metrics during a period of elevated construction program. Fitch's financial
projections embed a lower than currently authorized ROEs consistent with a
trend in the recent NYPSC utility rate case outcomes.

A Balanced Regulatory Environment: The ratemaking features of New York's
regulatory framework; such as revenue decoupling, commodity pass-through
mechanism, and a forward test year, supported a stable utility profile. Fitch
views the risk of a material change in regulatory treatment or rate design
features low, at least over the rating horizon.

Enhanced Regulatory Ring-fencing: The NYPSC imposed regulatory ring-fencing
measures, through an October 2013 regulatory order approving IUSA's
reorganization, are positive for RGE's credit-risk profile. The new
ring-fencing measures require a minimum equity to capital ratio of 48%, limit
dividend distributions under certain circumstances, and require RGE to
maintain, at least, investment grade rating for its lowest rated debt. These
provisions enhance RGE's credit profile and render the rating linkages weak
between RGE and IUSA.

Sufficient Liquidity: RGE relies on bank revolving credit facilities,
inter-company revolving credit facilities with IUSA, and an agreement with its
affiliates, Central Maine Power Company (CMP) and New York State Electric &
Gas Company (NYSEG), for using excess cash under certain circumstances. About
$45 million was outstanding under the IUSA provided revolving credit facility.
As of March 31, 2014, no debt was outstanding under other inter-company credit
facilities and the excess cash agreement.

RGE jointly entered into a bank revolving credit facility (the Joint Facility)
that allows maximum borrowings of up to $600 million in aggregate and expires
in July 2017. Sub-limits under the Joint Facility apply to each of the joint
borrower and can be altered within the constraints imposed by maximum limits
that apply to each joint borrower. The maximum credit limit for RGE under the
Joint Facility is $100 million. Nothing was outstanding under the Joint
Facility at the end of March 2014.

In 2013 RGE became a party to an intercompany agreement along with CMP and
NYSEG, under which each party to the agreement may lend to, or borrow from,
the other parties, when the respective party has either a temporary cash
surplus or short-term borrowing need. The agreement allows the parties to
optimize their aggregate liquidity positions.

Parent Company Liquidity: IUSA (consolidated) liquidity as of March 31, 2014
was $1,138 million, and includes bank and inter-company revolving credit
facilities and $302 million in cash. Total amount available under the
revolving credit facilities was $836 million. $531 million available under the
revolving credit facilities was restricted to IUSA's regulated operating
subsidiaries. RGE has an intercompany credit facility under a demand note
agreement with IUSA that provides financing of up to $150 million and expires
in 2018.
No Material Debt Maturities: Debt maturities over the rating horizon are
minimal and RGE has sufficient liquidity to manage its short-term borrowings
($45 million) and 2016 debt maturities ($39 million).

RATING SENSITIVITIES

Elevated capital spending over the rating horizon (2014 - 2017) and the
upgrade of RGE's IDR to 'BBB' from 'BBB-' limit the possibility for a positive
rating action in the near future. However, Fitch will take a positive rating
action if the EBITDAR based leverage (adjusted debt/EBITDAR) declines to 3.3x
or below on a sustainable basis.

Any deterioration in RGE's cash flow due to an adverse regulatory treatment of
RGE's request to implement general rate case increase will lead to a negative
rating action by Fitch. Fitch has relied on a balanced regulatory outcome in
assigning the IDR. Fitch will also downgrade RGE if the EBITDAR based leverage
increases to 4.0x or higher on a sustainable basis.

Fitch has upgraded the following ratings and revised the Outlook to Stable
from Positive:

Rochester Gas & Electric Company:
--IDR to 'BBB' from 'BBB-';
--Senior secured debt to 'A-' from 'BBB+';
--Senior unsecured debt to 'BBB+' from 'BBB';
--Short-term IDR to 'F2' from 'F3';

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835503
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst
Roshan Bains
Director
+1-212-908-0211
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Hornick
Senior Director
+1-212-908-0523
or
Committee Chairperson
Shalini Mahajan
Senior Director
+1-212-908-0351
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com
 
Press spacebar to pause and continue. Press esc to stop.