TEXT-S&P may cut Central Maine Power ratings
Overview -- We are placing our 'BBB+' corporate credit rating on ultimate parent Iberdrola S.A. on CreditWatch with negative implications, which reflects the potential for a downgrade if we lower the rating on Spain to speculative grade. -- On Oct. 10, 2012, we lowered our sovereign ratings on the Kingdom of Spain to 'BBB-/A-3'. The outlook remains negative. -- We consider that Spain-based utility Iberdrola has "high" exposure to domestic country risk as it derived about 47% of revenues from Spain in 2011. -- Furthermore, we see a risk that Iberdrola will struggle to achieve and maintain cash flow measures commensurate with the 'BBB+' rating in a more challenging economic and fiscal environment. -- We are placing our 'BBB+' corporate credit ratings on Central Maine Power on CreditWatch with negative implications. -- The ratings on Central Maine Power (CMP), New York State Electric & Gas (NYSEG), Rochester Gas & Electric (RG&E), and Central Maine Power (CMP) are all capped at the rating on the parent. Rating Action On Oct. 15, Standard & Poor's Rating Services placed its ratings on CMP, including the 'BBB+' corporate credit rating, the 'A-' senior secured issue rating, and the 'BBB+' senior unsecured issue ratings on CreditWatch with negative implications. At the same time, we affirmed our 'A-2' short-term rating on CMP. Rationale The rating action follows the downgrade on the Kingdom of Spain to 'BBB-/A-3' from 'BBB+/A-2' with a negative outlook, which resulted in the ratings on ultimate parent Iberdrola S.A. being placed on CreditWatch with negative implications. We regard the U.S. utilities, which include NYSEG, Central Maine Power Co. (CMP), and Rochester Gas & Electric Corp. (RG&E), as effectively under Iberdrola S.A.'s direct control, and none individually is a significant source of cash flow for the holding company. Our ratings on NYSEG, RG&E, and CMP therefore do not reflect significant support from Iberdrola S.A., but they are effectively capped at the rating on the parent. We consider that Spain-based utility Iberdrola has "high" exposure to domestic country risk as it derived about 47% of revenues from Spain in 2011. Furthermore, we see a risk that Iberdrola will struggle to achieve and maintain cash flow measures commensurate with the 'BBB+' rating, mainly adjusted funds from operations (FFO) to debt of more than 20%, in a more challenging economic and fiscal environment. The group is due to announce its strategic plan on Oct. 24, 2012. We will assess whether this plan will be sufficient to counterbalance the potential downside in our forecasts as a result of ongoing weak power market fundamentals in Spain and the U.K., increased political risk, delays in tariff deficit securitization, and/or a potential electricity market reform that could have adverse consequences for Iberdrola. The U.S. utilities do not currently have sufficient ring-fencing measures in place to separate the ratings from the parent. If the companies were to put ring-fencing measures in place to sufficiently insulate them from the parent company, they might be able to achieve ratings separation and avoid a ratings downgrade strictly because of a ratings downgrade at the parent company. Absent any additional insulation provisions, the utility ratings would continue to be capped at the parent ratings. Standard & Poor's bases its ratings on electric utility Central Maine Power Co. (CMP) on the utility's stand-alone credit profile because its ultimate parent company, Spanish utility holding company Iberdrola S.A. (BBB+/Watch Neg/A-2), has assumed the debt of its parent company, Iberdrola USA (BBB+/Watch Neg/A-2). Iberdrola S.A. is therefore directly responsible for servicing the subholding company's debt and has unequivocally expressed its full support for its immediate U.S. subsidiary. We regard the U.S. utilities, which include CMP, New York State Electric & Gas Corp., and Rochester Gas & Electric Corp., as effectively under Iberdrola S.A.'s direct control, and none individually is a significant source of cash flow for the holding company. Our ratings on CMP, therefore, do not reflect significant support from Iberdrola S.A., but they are effectively capped at the rating on the parent. Our ratings reflect CMP's low-risk business strategy and excellent business profile and are tempered by an aggressive financial position that may come under pressure since the company has begun expanding its transmission system and increased its short-term financing needs. CMP's principal business consists of its regulated electricity transmission and distribution operations in Maine. CMP has about 600,000 customers in its service territory of about 11,000 square miles in southern and central Maine. The territory has a population of about 1 million and contains most of Maine's industrial and commercial centers, including the City of Portland and the Lewiston-Auburn, Augusta-Waterville, and Bath-Brunswick areas. The company is undertaking a large transmission project that will improve reliability and service and interconnect renewable generation in northern Maine. The regulatory environment in the region generally supports CMP's credit quality. CMP operates under regulatory agreements that provide for full recovery of electricity and gas costs, stranded costs, and returns that are in line with industry averages. Regulatory pass-through mechanisms help to mitigate spikes in short-term borrowing needs. CMP's $1.4 billion Maine Power Reliability Program (MPRP), which includes 500 miles of new and upgraded transmission and four new 345-kilovolt substations and is to be completed in 2015, will allow CMP to maintain adequate reliability of its transmission network in compliance with federally mandated standards. The improvements in the grid will allow for new electricity to flow between Canada and New England and improve the power grid in Maine to accommodate electricity from in-state generators, including the emerging renewable generation resources. The demands of the transmission construction will affect CMP's financial position. CMP's financial risk profile is "aggressive" under our criteria. As of June 30, 2012, CMP generated $271 million in adjusted funds from operations (FFO) and had total adjusted debt of $1 billion. For the same period, adjusted total debt to total capital was about 46%, adjusted debt to EBITDA was 4.1x, and adjusted FFO to total debt was 27%. The credit metrics reflect the off-balance-sheet debt imputation of about $161 million, which includes a shortfall in pension and other postretirement liability funding. While the financial profile should benefit from approved and proposed rate increases, the large capital spending program and need for external financing will pressure credit protection measures, necessitating a balanced funding approach. Liquidity The short-term rating on CMP is 'A-2'. Liquidity is adequate under Standard & Poor's corporate liquidity methodology, which categorizes liquidity in five standard descriptors. Adequate liquidity supports our 'BBB+' issuer credit rating on CMP. Iberdrola USA manages CMP's liquidity, and each of the U.S. operating utilities is a joint borrower in a $600 million utility-only credit facility maturing in 2016, with about $527 million currently available. The company's projected sources of liquidity, mostly operating cash flow and available bank lines, exceed its projected uses, mainly necessary capital expenditures and debt maturities, by more than 1.2x. CMP's ability to absorb high-impact, low-probability events with limited need for refinancing, its flexibility to lower capital spending or sell assets, its sound bank relationships, its solid standing in credit markets, and its generally prudent risk management further support our assessment of its liquidity as adequate. We base our assessment of CMP's liquidity on the following factors and assumptions: We expect the company's liquidity sources (including FFO and credit facility availability) over the next 12 months to exceed its uses by more than 1.2x. Debt maturities over the next year are manageable. Even if EBITDA decreases by 15%, we believe that net sources will be well in excess of liquidity requirements. The company has good relationships with its banks, in our assessment, and has a good standing in the credit markets. In our analysis, based on information available as of June 30, 2012, we assumed liquidity of about $800 million over the next 12 months, consisting of projected FFO and availability under the credit facility. We estimate the company could use roughly $665 million during the same period for capital spending and debt maturities. CMP's credit agreement includes a financial covenant limiting the consolidated debt-to-capitalization ratio, with which the company was complying as of June 30, 2012. Recovery analysis We assign recovery ratings to first mortgage bonds (FMBs) issued by investment-grade U.S. utilities, which can result in issue ratings that are notched above a corporate credit rating on a utility depending on the category and the extent of the collateral coverage. We base the investment-grade FMB recovery methodology on the ample historical record of 100% recovery for secured bondholders in utility bankruptcies and on our view that the factors that supported those recoveries (limited size of the creditor class, and the durable value of utility rate-based assets during and after a reorganization, given the essential service provided and the high replacement cost) will persist. Under our recovery criteria, when assigning issue ratings to utility FMBs, we consider our calculation of the maximum amount of FMB issuance under the utility's indenture or other legally binding limitations relative to our estimate of the value of the collateral pledged to bondholders, management's stated intentions on future FMB issuance, as well as any regulatory limitations on bond issuance. FMB ratings can exceed a corporate credit rating on a utility by up to one notch in the 'A' category, two notches in the 'BBB' category, and three notches in speculative-grade categories. CMP's FMBs benefit from a first-priority lien on substantially all of the utility's real property owned or subsequently acquired. Collateral coverage of less than 1.5x supports a recovery rating of '1', reflecting our expectation for very high (90%-100%) recovery in the event of default, and an issue rating one notch above the corporate credit rating. CreditWatch The resolution of the CreditWatch listing on CMP is directly tied to the outcome of the ultimate parent Iberdrola S.A.'s CreditWatch resolution. We expect that CMP will move lockstep with the parent. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept.18, 2012 -- ?Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Ratios and Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 -- Credit FAQ: What's Behind Our Rating Action on Spanish Power Utilities, April 4, 2012 Ratings List Ratings Placed on CreditWatch To From Central Maine Power Corporate Credit Rating BBB+/Watch Neg BBB+/Stable Senior Secured A-/Watch Neg A- Senior Unsecured BBB+/Watch Neg BBB+
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