Rating Action Commentary
ֳ Affirms ConEd & Subsidiaries at 'BBB+'; Outlook Remains Negative
Mon 14 Dec, 2020 - 4:15 PM ET
ֳ - New York - 14 Dec 2020: ֳ has affirmed the Long-Term Issuer Default Ratings (IDRs) of Consolidated Edison, Inc. (ED) and its regulated utility subsidiaries Consolidated Edison Company of New York, Inc. (CECONY), Orange & Rockland Utilities, Inc. (ORU) and Rockland Electric Co. (RECO) at 'BBB+'. ED, CECONY and ORU's Short-Term IDRs and CP rating is affirmed at 'F2'. The Rating Outlooks for all entities is Negative.
ED's ratings reflect the ownership of, and historically predictable cash flows from, its two transmission and distribution (T&D) regulated utilities, CECONY and ORU, that are projected by ֳ to contribute the bulk of consolidated earnings and cash flows over the forecast horizon.
The Negative Rating Outlook reflects ֳ's view at the start of the pandemic that that ED's service territory would be severely impacted by the coronavirus and, as such, ED and major subsidiary CECONY's credit metrics are likely to weaken. While some regulatory mechanism helped to offset some of the financial impacts, ֳ remains concerned about the magnitude of pandemic-related deferrals and expenses, and the ability to recover the various costs in future rate cases. Also of concern is the possibility that the legislatively mandated disconnection moratorium is extended past its March 2021 expiration.
In addition to the pressures brought about by the pandemic, CECONY and ORU's service territories suffered significant damage as a result of Tropical Storm Isaias, which occurred in August 2020. As a result, the New York Public Service Commission (NYPSC) launched an investigation into CECONY's and ORU's preparation for, and response to, the storm, which could result in financial penalties or NYPSC action to revoke or modify CECONY's or ORU's certificates or franchises. Also, legislation introduced in reaction to the utilities' storm response could severely undermine the state regulatory compact in ֳ's opinion by increasing penalties and facilitating license revocation.
Prior to the coronavirus outbreak and Tropical Storm Isaias, ֳ forecasted ED's consolidated FFO leverage to average near, or at, the rating threshold of 5.0x over the forecast period. ֳ now forecasts ED's consolidated FFO leverage to exceed the rating threshold of 5.0x in 2020 and 2021. CECONY's FFO leverage was expected to average approximately 4.7x over the rating horizon. ֳ now expects that CECONY's FFO leverage will exceed 5.0x in 2020 and 2021. ֳ's expectation for ORU remains largely unchanged with forecasted FFO leverage to average 4.6x over 2020-2022. ֳ's forecasted metrics include assumptions for significant equity issuances and/or monetization of noncore assets.
Without measures taken by management and/or improved regulatory support, negative rating action may be warranted for ED and its subsidiaries. ֳ maintains its stated intention to allow utility companies whose metrics are outside of the downgrade thresholds until the end of 2021 to return to within the stated thresholds. While that also applies to ED and its subsidiaries, adverse legislation would likely result in a negative rating action earlier than that time frame. It also should be noted that a downgrade of the LT IDR of ED or CECONY to 'BBB' may result in a downgrade of ED, CECONY and ORU Short-Term IDRs to 'F3' as per ֳ's Short-Term Ratings Criteria.
Key Rating Drivers
Consolidated Edison, Inc.
Tropical Storm Isaias Investigation: The service territories of utility subsidiaries, Consolidated Edison Company of New York (CECONY; 'BBB+'/Negative) and Orange & Rockland Utilities, Inc. (ORU; 'BBB+'/Negative) suffered significant damage as a result of Tropical Storm Isaias, which occurred in August 2020. The storm resulted in outages for approximately 330,000 CECONY electric customers and 200,000 ORU electric customers.
The company reported that as of Sept. 30, 2020, it has incurred total costs for Tropical Storm Isaias of $172 million. CECONY's and ORU's electric rate plans provide for recovery of operating costs and capital expenditures under different provisions. As such, $96 million of the above amount has been charged against storm reserves pursuant to New York electric rate plans. The remaining amounts are either reflected in current rates as capital expenditures or deferred for recovery as regulatory assets.
The NYPSC launched an investigation into CECONY's and ORU's preparation for and response to Tropical Storm Isaias. As a result of the investigation, the NYPSC issued an order on Nov. 19, 2020, initiating proceedings to formally investigate and adjudicate what the commission has determined to be apparent violations of public service law and requiring the companies to respond in 30 days as to why the NYPSC should not commence a civil penalty action and/or an administrative penalty proceeding.
The commission order specifies potential penalties of up to $102.3 million for CECONY and $19 million for ORU. Additionally, if the NYPSC determines that there have been violations of the public service law, the show case order states that the NYPSC would commence a proceeding to revoke or modify CECONY's and/or ORU's certificate of public convenience and necessity, which ֳ understands could be a prerequisite legal requirement for exercising franchise rights in the state of New York.
ED and its utility subsidiaries plan to defend against potential violations and/or penalties. Any action by the NYSPC or state legislature to revoke or modify CECONY's or ORU's certificates or franchises or significantly increase penalties would likely have negative rating consequences.
Coronavirus Sales Impacts: Economic activity has been severely impacted in ED subsidiaries' service territories as a result of the coronavirus pandemic. Particularly hard hit is CECONY's electric service territory. CECONY's electric sales accounted for 64% of ED's 2019 operating revenues and electric sales accounted for 75% of CECONY's operating revenues.
ֳ estimates that residential sales account for 45%-47% of CECONY's electric revenues and commercial sales account for 52%-55% of sales. ED disclosed that from March 16 to Oct. 31, 2020 weather-adjusted residential CECONY electric delivery volumes increased 11% while commercial volumes declined 17%. Over the same period residential revenues increased 8% and commercial revenues declined 14%. ORU's weather-adjusted impact over the same period was an increase in residential delivery volumes of 9% and a commercial volume decline of 10%. ORU's residential revenues increased 7% and commercial revenues declined 9%.
CECONY and ORU benefit from electric and gas revenue decoupling mechanisms (RDM) in New York for all customer classes. ED estimates that approximately 87% of the company's consolidated revenues and 94% of utility revenues are subject to RDMs. CECONY recently implemented a RDM adjustment covering sales variations from January 2020 to June 2020. While CECONY's electric revenues are reconciled twice yearly, CECONY's gas revenues and ORU's electric and gas revenues are reconciled annually with any recovery or refund under those mechanisms generally effective in February of the following year.
Regulatory and Legislative Coronavirus Response: CECONY and ORU voluntarily suspended disconnections, late charges, and other fees in March of 2020. Subsequently, the state of New York enacted a law prohibiting residential disconnections during the current state of emergency, and potentially, up to 180 days thereafter. The law will expire in March 2021; however, ֳ understands that an extension is possible.
In October 2020, NJ extended its disconnection moratorium by executive order until March 15, 2021. As of Sept. 30, 2020, ED's consolidated allowance for uncollectible accounts is $118 million, a $48 million increase from the year ago period. CECONY's and ORU's current rate plans provide for total of $54 million in bad debt expense for 2020. The utilities are expected to request the ability to defer amounts exceeding current rate recovery until the companies' next rate cases.
NYPSC opened a generic docket in June 2020 to investigate the impacts of the coronavirus pandemic on utility service. The commission has not given any indication of the investigation's time table or potential regulatory actions such as deferred accounting for pandemic-related expenses.
Conservative Business Model: ED's credit profile benefits from the normally predictable cash flows of regulated utility subsidiaries CECONY and ORU and the financial support it receives from them through dividends for payment of corporate expenses, dividends to common shareholders and other business matters. ֳ forecasts the utilities will represent around 90% of consolidated EBITDA over 2021-2023.
CECONY was the largest contributor to consolidated EBITDA at approximately 85% as of TTM ended Sept. 30, 2020. Investments in long-term contracted renewables and, to a lesser extent, regulated electric and gas infrastructure projects, contribute the remainder of consolidated earnings and cash flows.
Concerns Regarding Declining Regulatory Support: ED and its utility subsidiaries had historically benefited from predictable regulation by the NYPSC. The company's long-term financial stability has been supported by various regulatory mechanisms, including revenue decoupling, forward-looking test years and trackers for large operating expenses. While authorized multiyear settlements are frequently achieved in New York authorized ROEs at CECONY and ORU are some of the lowest in the nation. ֳ is concerned about the magnitude of COVID-related deferrals and expenses, especially at CECONY and the ability to recover the various costs in future rate cases. Additionally, ֳ is concerned that recent state legislative mandates and politically motivated incursions could undermine the state's regulatory compact.
Ring-Fencing Triggers: Ring-fencing triggers that were established by the NYPSC in CECONY's 2017 rate plan (and ORU's 2019 rate plan) and further modified in the recently enacted rate plan provide ֳ with greater confidence that ED will maintain a conservative business strategy over the forecast period, centered on the company's low-risk T&D utilities.
ED will monitor semi-annually whether its investments in its non-utility businesses exceed 15% of total consolidated operations as measured by revenues, assets or cash flows or if the ratio of holding company debt as a percentage of total consolidated debt rises above 20%. If so, CECONY will notify the NYPSC when these triggers occur and submit a filing providing a ring-fencing plan to insulate CECONY, or alternatively, demonstrate why additional ring-fencing measures are not necessary at that time.
Elevated Capex: Management expects consolidated capital investments of approximately $11.6 billion over 2020-2022, including $9.7 billion, or approximately 83% of total consolidated capex, at CECONY; $628 million, or 5%, at ORU. The company continues to invest to improve reliability, integrate new technologies and accelerate replacement of leak-prone gas distribution lines.
Pressured Credit Metrics: ֳ forecasts ED's consolidated FFO leverage to exceed the rating threshold of 5.0x in 2020 and 2021. On a positive note, ֳ estimates that ED's total parent level indebtedness is approximately 9%, which is low for utility parent companies and is expected to decline. ֳ's forecasted metrics include assumptions for significant equity issuances and/or monetization of noncore assets. In rating ED, ֳ treats the modest amount of nonrecourse project financing as on-balance-sheet debt and reflects the leverage in the consolidated credit metrics. Without measures taken by management and/or improved regulatory support, negative rating action may be warranted for ED and its subsidiaries.
Parent-Subsidiary Linkage: There is a strong rating linkage among ED and its two principal regulated utility subsidiaries, CECONY and ORU. A downgrade of CECONY, given strong operational and financial ties, with the utility generally contributing nearly 90% of ED's consolidated cash flows, would likely result in a downgrade of ED.
A downgrade of ED would likely result in a downgrade of ORU, given the subsidiary's small size within the corporate structure. The linkage also reflects a shared bank credit facility and parental support in the form of equity infusions to maintain the utilities' statutory capital structures. Given the linkages, ֳ would allow a maximum of a one-notch differential between the Long-Term Issuer Default Ratings (IDRs) of ED and CECONY and ORU. As regulated utilities, both CECONY and ORU are considered stronger credits than ED. ֳ assigns RECO the same IDR as ORU given its small size and dependence on ORU for all funding and management support.
Consolidated Edison Company of New York, Inc.
2019 Rate Settlement: CECONY filed a joint proposal with the major parties in the case on Oct. 18, 2019, which was approved on Jan. 16, 2020. Under the terms of the settlement, CECONY will be allowed to raise electric base rates by $113 million in 2020, $370 million in 2021 and $326 million in 2022. The settlement calls for gas base rate increases of $84 million in 2020, $122 million in 2021 and $167 million in 2022. Electric and gas rates are set on an 8.8% ROE and 48% equity capitalization.
The enacted rate plan provides for performance incentives and allows the company to earn up to 9.3% before earnings are shared with customers. The plan includes electric earnings incentives for energy efficiency and other potential incentives of $69 million in 2020, $74 million in 2021 and $79 million in 2022 and gas earnings incentives of $20 million in 2020, $22 million in 2021 and $25 million in 2022. The plan also includes penalties for not meeting specified targets related to service, reliability and safety, among other matters.
Reforming the Energy Vision (REV): ֳ believes efforts to transform the traditional utility distribution business model of New York T&D utilities, under the REV initiative, has no near-term impact on CECONY's credit profile. ֳ expects REV-related capex to represent less than 5% of capital investments over the forecast horizon. The company is able to recover REV-related capex as part of the rate-making process, and can earn additional incentives through approved earnings adjustment mechanisms.
Clean Energy Legislation: New York enacted the Climate Leadership and Community Protection Act in July 2019. The legislation requires that 70% of electricity procured by utilities in the state be produced by renewable energy systems by 2030 and that by 2040 the statewide electrical demand system has zero emissions. The law also codifies state targets for energy efficiency, offshore wind, solar and energy storage. While the CLCPA implementation is still in the early stages, ֳ is concerned that CECONY could be required to spend additional capital to facilitate the interconnection of additional renewable resources, thereby addition additional amounts to be recovered in future rate cases.
Significant Capex Requirements: Management expects capex of roughly $9.7 billion over 2020-2022. Capex is primarily earmarked toward replacement of aged infrastructure; network reliability enhancement, including a sizable advanced metering infrastructure program; leak-prone pipe replacement; and REV-related projects. ֳ projects CECONY's internally generated cash flows to support, on average, 80% of capex over the forecast period.
Weaker Credit Metrics: CECONY's credit metrics weakened in 2018 as a result of tax reform. Prior to the coronavirus outbreak, ֳ expects that the recently enacted rate plan will forestall any significant recovery in credit metrics over the 2020-2022 rate plan period, as a result of the below-average authorized 8.8% ROE and continued effects of tax reform.
While the RDM mechanism has worked as expected, the company deferred amounts for summer cooling expenses, increase in uncollectible expense, summer generation costs and storm costs. Many of the expenses are deferred until the next rate case or recovered over a multiyear periods. As a result of the deferrals, CECONY's cash flow has been reduced in the near term.
Prior to the coronavirus pandemic, CECONY's FFO leverage had been expected to average approximately 4.7x over the rating horizon, with some years approaching the threshold of 5.0x. ֳ now expects that CECONY's FFO leverage will exceed 5.0x in 2020 and 2021. Without measures taken by management or improved regulatory support, negative rating action may be warranted.
Orange and Rockland
NY Rate Plan Approval: On March 14, 2019, the NYPSC approved the joint proposal reached in November 2018 by ORU, PSC staff and other parties. The rate plan increases ORU's electric rates on a phased-in basis over 2019-2021 by $33 million and decreases gas rates over the period by $4 million.
The rate changes include the effects of the Tax Cuts and Jobs Act's reduction in the corporate income tax rate. The 2019 rate changes are retroactive to Jan. 1, 2019. The rates are based on a 9.0% ROE and 48% equity capitalization, unchanged from the prior three-year plan, and include an earnings-sharing mechanism for earnings above a 9.6% ROE and the continuation of revenue decoupling. ֳ views the 2019 rate plan as balanced and consistent with expectations.
New Jersey Rate Proceeding: In January 2020, the New Jersey Board of Public Utilities approved an electric rate increase of $12 million, effective Feb. 1, 2020, for RECO, which serves 73,000 customers in parts of northern New Jersey. The company originally requested a $19.9 million rate increase based on a 10% ROE and 49.93% equity capitalization, but subsequently updated this to $20.3 million based on a 9.6% ROE and a 50.16% equity capitalization.
Reduced Capex: ORU plans to spend approximately $628 million over 2020-2022 compared with approximately $633 million over the prior three years. Capex is earmarked for investments in electric and gas infrastructure, implementation of an advanced metering infrastructure system and, to a lesser extent, projects addressing New York's Reforming the Energy Vision initiative.
Declining Credit Metrics: ֳ forecasts FFO leverage to average 4.6x over 2020-2022. The projected credit metrics assume the approved three-year rate plan. ֳ expects ORU's internally generated cash flows to fund 75% of capex requirements on average, with the remainder funded through debt issuance and parent equity infusions.
Small Size in Corporate Structure: ORU's ratings are closely aligned to the ratings of its parent holding company, ED given ORU's relatively small size and the benefit of ownership by a large parent that can provide financial support if needed. ORU represented 7% of ED's consolidated net revenue and 5% of consolidated EBITDA as of Sept. 30, 2020. ֳ assigns RECO the same Issuer Default Rating (IDR) as ORU, given its small size and dependence on ORU for all funding and management support.
Derivation Summary
ED's credit profile as a utility parent holding company is weakly positioned at the 'BBB+' rating category both in terms of credit metrics and geographic diversity compared to peers Eversource Energy (BBB+/Stable) and AVANGRID, Inc. (BBB+/Stable). Eversource and AVANGRID's multistate utility operations provide slightly more regulatory diversification than ED, which is predominantly a one-state utility, with the majority of its operations in the large urban service area of New York City.
As a result of pandemic and storm expenses and deferrals, ED's credit metrics have weakened significantly. ֳ forecasts ED's consolidated FFO leverage to exceed the rating threshold of 5.0x in 2020 and 2021. ֳ expects FFO leverage to average around 5.0x through 2023 for AVANGRID and 5.3x-5.5x for Eversource.
The expectation for elevated leverage at AVANGRID and Eversource reflect both companies' development of large offshore wind projects in the Northeast, which include increased risk during the multiyear permitting and construction phases, but would provide long-term contracted cash flow once in operation. On a positive note, ֳ estimates that ED's total parent level indebtedness is approximately 9%, which is low for utility parent companies and is expected to decline.
Key Assumptions
ֳ's Key Assumptions Within Our Rating Cases for the Issuer Include
-Implementation of the CECONY enacted rate plan effective Jan. 1, 2020;
-Implementation three-year rate plan at ORU per settlement terms effective Jan. 1, 2019;
-Consolidated capex of $11.7 billion over 2020-2022;
-Equity issuance and/or monetization of non-core assets with use of proceeds primarily utilized for the maintenance of utility subsidiaries' capital structures;
-Dividend payout ratio between 65% and70%.
RATING SENSITIVITIES
ED
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Given the Negative Rating Outlook, no positive rating action is anticipated in the near term;
--FFO leverage less than 4.0x on a sustained basis;
--Given strong financial ties, an upgrade of CECONY.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Given strong financial ties, a downgrade at CECONY;
--FFO leverage greater than 5.0x on a sustained basis;
--Passage of New York legislation resulting in the potential for increased penalties, enforcement actions, or the ability to revoke or modify CECONY's or ORU's ability to conduct business in the state;
--A more aggressive management strategy toward the non-utility businesses, including investments into more volume/ commodity-price sensitive midstream operations, that leads to incremental parent leverage.
CECONY
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Given the Negative Rating Outlook, no positive rating action is anticipated in the near term;
-FFO leverage less than 4.0x on a sustained basis;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--A significant deterioration in the New York regulatory compact;
--FFO leverage greater than 5.0x on a sustained basis;
--Passage of New York legislation resulting in the potential for increased penalties, enforcement actions, or the ability to revoke or modify a CECONY's ability to conduct business in the state.
ORU
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Given the utility's small size within the corporate family and close linkage to ED, an upgrade at ED could lead to positive rating actions.
--FFO leverage less than 4.0x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--A downgrade at ED;
--FFO leverage greater than 5.0x on a sustained basis;
--A significant deterioration in the New York or New Jersey regulatory compact;
--Passage of New York legislation resulting in the potential for increased penalties, enforcement actions, or the ability to revoke or modify ORU's ability to conduct business in the state.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Group liquidity is supported by a $2.25 billion shared bank credit facility that will expires in December 2022. In April 2019, the credit facility termination date was extended to December 2023 with respect to banks with aggregate commitments of $2.2 billion.
As of Sept. 30, 2020, approximately $1,394 million of consolidated liquidity was available, including $1,241 million of unused facilities and $153 million of cash and cash equivalents. The bank credit facility has a covenant that requires total debt/total capital to be no greater than 65%.
All ED entities were in compliance as of Sept. 30, 2020. In July 2020, ED borrowed $820 million pursuant to a supplemental credit agreement due March 2021, which was repaid with the proceeds of recent debt and equity issuance. Consolidated long-term debt maturities are considered manageable, with $1,967 million due in 2021 $437 million due in 2022, and $293 million due in 2023.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on ֳ's ESG Relevance Scores, visit .
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Applicable Criteria
Applicable Models
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
Additional Disclosures
Endorsement Status
| Consolidated Edison Company of New York, Inc. | EU Endorsed |
| Consolidated Edison, Inc. | EU Endorsed |
| Orange and Rockland Utilities, Inc. | EU Endorsed |
| Rockland Electric Company | EU Endorsed |