Fitch Rates ConEd's $500MM Senior Unsecured Debentures 'BBB+'

Fitch Ratings has assigned a 'BBB+' rating to Consolidated Edison, Inc.'s (ED) ('BBB+' Issuer Default Rating/Stable Outlook) new $500 million issue of senior unsecured debentures due in 2021.

Net proceeds will be used for general corporate purposes, including repayment of outstanding short-term debt, and to subsequently fund the purchase of ED's 50% ownership interest in the midstream joint venture (JV) with Crestwood Equity Partners LP (Crestwood) with available cash and proceeds from the issuance of additional short-term debt.

Fitch views the JV transaction as largely neutral to ED's credit profile. ED will make a cash contribution of $975 million for its ownership interest with an implied market value of almost $2 billion and a 13x EBITDA multiple. ED will receive 65%/65%/60% of JV cash distributions for the first three years post-closing, and 50% of distributions thereafter. ED's ownership interest will be held under a subsidiary of Con Edison Transmission, Inc. (CET), which is a wholly-owned subsidiary of ED. The transaction is expected to be substantially completed in second quarter 2016.

The JV will own and develop Crestwood's three existing natural gas pipelines and four storage facilities located in northern Pennsylvania and southern New York, well situated within the core of the Northeast Pennsylvania Marcellus shale gas-rich supply area.

KEY RATING DRIVERS

Marginal Impact of JV on Credit Metrics: Given the modest scope of the initial JV investment, with cash distributions projected to contribute approximately 2% of ED's consolidated EBITDA on average, and JV acquisition debt representing approximately 3% of consolidated debt at year-end 2015, Fitch considers the impact of the transaction on ED's consolidated metrics to be marginal. Fitch finds some level of comfort in management's commitment to fund the transaction in a conservative manner based on the existing capital structure.

Pro-forma parent-level debt is projected to remain low at approximately 10% of total consolidated debt. Fitch estimates pro-forma consolidated FFO-adjusted leverage and adjusted debt/EBITDAR credit measures to average 4.4x and 4.0x, respectively, over 2016 - 2019, consistent with ED's existing ratings.

Fitch expects ED's wholly-owned regulated utilities, Consolidated Edison Co. of New York, Inc. (CECONY) and Orange & Rockland Utilities, Inc. (ORU), to remain the largest contributors to ED's earnings, representing more than 90% of consolidated EBITDA over 2016 - 2019, while JV assets are projected to contribute about 2% (after adjusting for maintenance capex) over the same time period.

CECONY and ORU enjoy several mechanisms that Fitch considers to be supportive of credit quality including forward-looking test years, multi-year rate plans, trackers for large operating expenses, and a revenue decoupling mechanism. Those mechanisms support the utilities' long-term financial stability.

Pending Rate Case: Fitch assumes a relatively balanced outcome in CECONY's pending rate case, similar to recent decisions of New York utility peers. However, given the prolonged rate freeze, CECONY's rate request to recover capex is somewhat sizeable, and as a result leads to heightened regulatory risk and public scrutiny. The utility filed for electric and gas base rate increases of $482 million and $154 million, respectively, to become effective in January 2017. Under Fitch's base case scenario that assumes CECONY operating under a 9% ROE over 2017 - 2019, and the utility credit ratios modestly improve from weaker 2015 - 2016 levels. Fitch's base case also assumes that CECONY can effectively control O&M to support the financial profile.

Event Risk: Fitch is concerned with CECONY's cash flow exposure to potential regulatory fines associated with the East Harlem natural gas explosion. The New York State Public Service Commission (NYSPSC) is conducting an investigation of the accident to determine if the utility bears some responsibility. There is no established timeline for the NYSPSC to render its decision, and Fitch will continue to monitor the progress of the investigation. Any ratings impact will be based on the amount and timing of potential fines and civil lawsuits as well as insurance coverage.

On a positive note, CECONY resolved the contractor kickback investigation with the NYSPSC as the commission approved a joint proposal (JP) reached between the utility and multiple parties, requiring CECONY to credit $116 million to customers, and for the period 2017 to 2044, to not seek to recover from customers an aggregate $55 million relating to return on capex. Fitch views the JP as credit neutral.

Elevated Capex: Management expects consolidated capex to amount to approximately $11.58 billion over 2016 - 2018, compared with approximately $8.79 billion over 2013 - 2015. Utility capex, representing approximately 80% of total spending over the forecast period, is earmarked primarily towards replacement of aged infrastructure, network reliability enhancement and heating oil-to-gas conversions of residential and commercial buildings in New York City, which the company projects will support peak gas growth of about 2.3% over the next five years. Remaining capex is earmarked towards investments in renewable and energy infrastructure projects, and projects at CET. Fitch expects ED to fund capex using a balanced mix of long-term debt and equity, and internally generated cash flows.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--CECONY base rate increase effective in 2017 with a 9% assumed ROE;

--ORU base rate increase as per the rate order;

--No fine associated with the Harlem gas explosion;

--Consolidated capex of $10.45 billion over 2015 - 2017;

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action:

Given the limited headroom in credit metrics for the current rating category, no positive rating action is anticipated in the near term.

Future developments that may, individually or collectively, lead to a negative rating action:

--Given the strong financial ties, a downgrade at CECONY;

--FFO-adjusted leverage at or greater than 5x on a sustained basis;

--A more aggressive management strategy towards the unregulated businesses, including investments into more volume/commodity-price sensitive midstream operations, that leads to incremental parent leverage.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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