NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘A-‘ rating to Brooklyn Union Gas Co.’s (BUG) dual tranche issuance of $500 million 3.407% senior notes due in 2026 and $500 million 4.504% senior notes due in 2046. The Rating Outlook is Stable. The new senior unsecured notes will rank pari passu with BUG’s existing senior unsecured obligations. Net proceeds will be used for general corporate purposes.
KEY RATING DRIVERS
Pending Rate Case: Fitch’s ratings assume a relatively balanced outcome in BUG’s pending rate case, similar to recent rate decisions of New York utility peers. That said, the rate case does present a certain level of regulatory risk. BUG’s base retail rates have been frozen since 2008, and, as a result, the rate request is sizeable and hence could draw political and ratepayer scrutiny. However, New York rate cases have typically resulted in multi-year settlements in recent years, providing gradual step-up increases which somewhat ease pressure on customer bills. BUG is seeking a $245 million base rate increase based on a 9.94% return on equity (ROE) and a 48% common equity ratio. New rates are expected to take effect in January 2017.
Elevated Capex: Fitch estimates capital spending to total $1 billion-$1.5 billion over the forecast period. Projected capex primarily targets replacement of aging infrastructure including main replacement of leak prone pipe, enhancement of network reliability, and gas growth projects including heating oil-to-gas conversions of residential and commercial buildings.
Stressed Credit Metrics: Fitch forecasts the ratios of funds from operations (FFO)-fixed charge coverage and FFO-adjusted leverage to weaken to the low 5xs by 2017, and improve approximately 50 basis points (bps) by 2019, assuming balanced rate relief in future rate filings. BUG’s FFO-based coverage and leverage metrics were 6.7x and 4.3x, respectively, at year-end March 2015.
Low-Risk Business Profile: BUG’s natural gas distribution business provides relatively stable earnings and cash flows. The company benefits from rate design features that include forward-looking test years, revenue decoupling and weather normalization, a purchased gas adjustment (PGA) clause, and trackers for large operating expenses.
Ratings Linkage: BUG relies on its ultimate parent National Grid plc (NG; ‘BBB’ IDR/Outlook Stable) for liquidity support, creating a moderate level of rating linkage between the IDRs of BUG and NG. However, ring-fencing measures including authorized regulatory capital structures, dividend payment restrictions, and absence of an operational overlap between BUG and the rest of the NG group provide sufficient separation for the company to be rated on a stand-alone basis.
Fitch’s key assumptions within the rating case include:
–Base rate increase effective in 2017;
–O&M incremental growth in the 0%-2% range;
–Capex totaling $1 billion-$1.5 billion over 2017-2020.
Future developments that may, individually or collectively, lead to a positive rating action:
Given the near-term decline in forecasted credit metrics and elevated capex, a positive rating action is unlikely in the near term.
Future developments that may, individually or collectively, lead to a negative rating action:
–An unfavorable rate order in the pending rate case;
–FFO-adjusted leverage greater than 5x on a sustained basis.
Date of Relevant Rating Committee: Dec. 7, 2015.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Utilities – Effective from 5 March 2015 to 4 March 2016 (pub. 05 Mar 2015)