-- 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
-- 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 Rochester Gas &
Electric on CreditWatch with negative implications.
-- The ratings on Rochester Gas & Electric (RG&E), New York State
Electric & Gas (NYSEG), and Central Maine Power (CMP) are all capped at the
rating on the parent.
On Oct. 15, 2012, Standard & Poor's Rating Services placed its ratings on
RG&E, including the 'BBB+' corporate credit rating, the 'A' senior secured
issue rating, and the 'BBB+' senior unsecured issue ratings on CreditWatch
with negative implications.
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
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.
Iberdrola USA is currently working with the New York Public Service Commission
to add additional insulation measures at NYSEG and RG&E. In September 2012,
the company filed with the NY PSC a supplement to the reorganization petition,
which discusses enhancement to the ring-fencing provisions, including a
minimum equity ratio to restrict dividends to the parent. 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 utilities NYSEG, RG&E, and CMP
on each company's stand-alone credit profile because their ultimate parent
company, Spanish utility holding company Iberdrola S.A. (BBB+/Watch Neg/A-2),
has assumed the debt of NYSEG's parent company, Iberdrola USA (BBB+/Watch
Neg/A-2). We regard the U.S. utilities 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 the utilities therefore do not reflect
significant support from Iberdrola S.A., but they are effectively capped at
the rating on the parent.
Our ratings on RG&E reflect an "excellent" business risk profile under our
criteria. The profile benefits from the utility's low-operating-risk
transmission and distribution (T&D) business strategy. The company's financial
risk profile is "aggressive" in our assessment, and while it has improved, a
sizable capital spending program could cause pressure.
RG&E is primarily an integrated electric and gas transmission and distribution
utility and has approximately 367,000 electric and 303,000 natural gas
customers in the Rochester, N.Y., area. RG&E operates under regulatory
agreements that provide for full and timely recovery of purchased electricity
and gas costs, stranded costs, and authorized returns that have been in line
with industry averages.
While Standard & Poor's views the regulatory environment in New York as less
credit supportive than in some states, RG&E has been able to reach a
constructive multiyear settlement in its rate case filing, reducing the need
for regular rate filings and ensuring cash flow stability. RG&E is currently
operating under a three-year settlement effective through Dec. 31, 2013. The
multiyear settlement, which includes several credit-enhancing recovery
mechanisms, is essentially favorable for RG&E's credit quality because it
should help it maintain cash flow stability.
RG&E's financial risk profile is aggressive. As of June 30, 2012, RG&E
generated $208 million in adjusted funds from operations (FFO) and had total
adjusted debt of $871 million. For the same period, adjusted total debt to
total capital was about 55%, adjusted total debt to EBITDA was 4.1x, and
adjusted FFO to total debt was 24%. The credit metrics reflect the
off-balance-sheet debt imputation of about $89 million resulting from a
shortfall in pension and other postretirement liability funding. While the
financial profile should benefit from the approved and proposed rate
increases, the large capital spending program and need for external financing
will place some pressure on the credit protection measures, necessitating a
balanced funding approach.
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 RG&E. 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. RG&E'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.
RG&E has no maturities in the next 12 months. Iberdrola USA manages RG&E'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.
We base our assessment of RG&E's liquidity on the following factors and
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 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 $340 million over the next 12 months, consisting of
projected FFO and availability under the credit facility. We estimate the
company could use up to $235 million during the same period for capital
spending and working capital. RG&E'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.
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.
RG&E's FMBs benefit from a first-priority lien on substantially all of the
utility's real property owned or subsequently acquired. Collateral coverage of
more than 1.5x supports a recovery rating of '1+', reflecting our expectation
for 100% recovery in the event of default, and an issue rating two notches
above the corporate credit rating.
Absent sufficient ring-fencing provisions the ratings of RG&E will remain
capped at the rating on the parent and be lowered along with the parent
rating. If the New York utilities are able to put sufficient ring-fencing
measures in place to insulate them from the parent, we may separate the
ratings at that time. We expect to resolve the CreditWatch listing on RG&E
when we gain more information from Iberdrola in its new strategic plan or when
we gain more information from the company regarding its ring-fencing plan.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
-- 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
Rating Placed On CreditWatch
Rochester Gas & Electric
Corporate Credit Rating BBB+/Watch Neg BBB+
Senior Secured A/Watch Neg A
Senior Unsecured BBB+/Watch Neg BBB+
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left