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Rating Action:

Moody's assigns Baa1 Issuer Rating to Iberdrola USA; upgrades IUSA's regulated subsidiaries by one notch

30 Jan 2014

Note: On April 19, 2017, the press release was corrected as follows: “Senior Secured Regular Bond/Debenture, to A2 from A3” was removed from the list of upgrades for Rochester Gas & Electric Corporation. Revised release follows.

New York, January 30, 2014 -- Moody's Investors Service assigned a Baa1 issuer rating to Iberdrola USA (IUSA), a subsidiary of Iberdrola SA (Iberdrola or ISA; Baa1 negative). Moody's also upgraded the ratings of IUSA's three regulated subsidiaries: New York State Electric & Gas (NYSEG; including its senior unsecured rating to A3 from Baa1), Central Maine Power (CMP; including its senior unsecured rating to A3 from Baa1) and Rochester Gas & Electric (RGE; including its issuer rating to Baa1 from Baa2). Moody's also affirmed the P-2 Commercial Paper ratings of NYSEG and CMP. This rating action completes our review of NYSEG, CMP and RGE, initiated on November 8, 2013. The outlooks for NYSEG, CMP and RGE are stable. The outlooks for Iberdrola SA and IUSA are negative.

"The Baa1 rating for IUSA reflects the credit strength of its parent company, ISA, in addition to IUSA's conservatively levered capital structure and a 50/50 regulated/unregulated business mix that should produce robust cash flow over the intermediate-term" , said Ryan Wobbrock, Assistant Vice President. "The negative outlook takes into account the negative outlook at ISA, a centralized liquidity management philosophy across the ISA family, and a lack of meaningful lending restrictions between IUSA and most of its affiliates" Wobbrock added.

"The upgrades for NYSEG, CMP and RGE reflect regulatory provisions in New York and Maine that are consistent with our view of a generally improving regulatory environment for US electric and gas utilities and a strong suite of ring-fence type provisions that help insulate these utilities from contagion affects stemming from its parent or affiliates", said Wobbrock.

RATINGS RATIONALE

IUSA's Baa1 issuer rating reflects a strong the relationship with its parent, as well as the stable and predictable cash flow generation of its core utility holdings in New York and Maine. The regulated utility portfolio is counterbalanced by a similarly sized base of non-utility assets, which includes approximately 5.4 GW of mostly wind generating facilities, around 132 Bcf of gas storage (half owned and half contracted), and a gas trading and marketing business. The unregulated segment adds risk to IUSA's credit profile, particularly the trading and marketing business, but given the size of contracted wind asset portfolio (approximately 70% of the wind portfolio's output is under long-term contracts) and limited unregulated capex over the near-term, we expect that IUSA will sustain around 30% cash flow to debt, which is appropriate for the rating, compared to other hybrid peers.

For NYSEG, CMP and RGE, the primary driver of today's rating action is Moody's more favorable view of the relative credit supportiveness of the US regulatory framework, as detailed in our September 23, 2013 Request for Comment: "Proposed Refinements to the Regulated Utilities Rating Methodology and our Evolving View of US Utility Regulation." Factors supporting this view include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators. The US utility sector's low number of defaults, high recovery rates, and generally strong financial metrics from a global perspective provide additional corroboration for these upgrades.

The rating upgrades for NYSEG and RGE reflect the supportive New York regulatory environment, where a wide variety of recovery mechanisms and single-issue special purpose trackers exist. The implementation of such mechanisms has helped each company improve its financial profile and the predictability of its cash flow generation in recent years.

The rating upgrade for CMP accounts for a constructive relationship between the company and its primary regulator, the Maine Public Utilities Commission (MPUC). The MPUC has typically offered the use of formulaic type rate design through Alternative Rate Plans (ARP), which provide for a high degree of cash flow visibility and predictability over a multi-year horizon. CMP has filed for an updated ARP and expects a decision sometime in mid-2014.

RATING OUTLOOK

The Negative outlook for IUSA is linked the negative outlook at its parent, which, for ISA, reflects (1) a degree of regulatory uncertainty as final details of the Spanish measures and effect on Iberdrola have yet to fully emerge; and (2) Moody's expectation that Iberdrola's financial metrics will remain somewhat weakly positioned in 2013 for the financial guidance for its Baa1 rating of retained cash flow (RCF)/net debt in the mid-teens in percentage terms and funds from operations (FFO)/net debt of around 20%, primarily due to earnings pressure in Spain and residual tariff deficits.

The stable outlooks for NYSEG, CMP and RGE reflect strong ring-fencing provisions that help to insulate the utilities from unregulated affiliates, in addition to the expectation for ongoing cost recovery support provided by their respective utility commissions.

What Could Change the Rating - Up

Given the negative outlook, it is unlikely that IUSA will be upgraded over the near-term; however, if ISA's rating were to improve, IUSA could receive similar upward ratings momentum.

NYSEG and RGE's ratings could be upgraded by an increased level of support from the New York Public Service commission, such that cost recovery and financial metrics improved to evidence cash flow to debt of about 25% and 20%, respectively, without the benefits of bonus depreciation.

CMP's rating could improve with the successful completion of its Maine Power Reliability Program (MPRP) transmission project and resulting cash flow to debt metrics over 25% on a sustainable basis, without the benefits of bonus depreciation.

What Could Change the Rating - Down

IUSA's rating would be downgraded with a downgrade of its parent, ISA. The rating could also feel negative pressure if IUSA were to increase capital expansion plans significantly, introduce a significant amount of leverage, or if there were to be debt issued at its direct subsidiary, Iberdrola Networks (an intermediate holding company between IUSA and NYSEG, CMP and RGE), which would add additional structural subordination between the company and its core utility holdings.

NYSEG, CMP and RGE would be downgraded with a material deterioration in regulatory support, or if cash flow to debt metrics dropped below the high teen's range for NYSEG and CMP, and below 15% for RGE.

Ratings Upgraded Include:

..Issuer: Central Maine Power Company

.... Issuer Rating to A3 from Baa1

....First Mortgage Bonds to A1 from A2

....Senior Unsecured Medium-Term Note Program to (P)A3 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture to A3 from Baa1

....Pref. Stock to Baa2 from Baa3

....Commercial Paper, Affirmed P-2

....Outlook, Stable

..Issuer: New York State Electric and Gas Corporation

.... Issuer Rating to A3 from Baa1

....Senior Unsecured Regular Bond/Debenture to A3 from Baa1

....Pref. Stock to Baa2 from Baa3

....Commercial Paper, Affirmed P-2

....Outlook, Stable

..Issuer: Rochester Gas & Electric Corporation

.... Issuer Rating to Baa1 from Baa2

.... First Mortgage Bonds to A2 from A3

....Senior Secured Medium-Term Note Program to (P)A2 from (P)A3

....Outlook, Stable

..Issuer: Indiana County I.D.A., PA

....Revenue Bonds to A3 from Baa1

..Issuer: New Hampshire St. Business Finance Authority

....Revenue Bonds to A3 from Baa1

..Issuer: New York State Energy Research & Dev. Auth.

....Revenue Bonds to A2 from A3

....Revenue Bonds to A3 from Baa1

....Revenue Bonds to Baa1 from Baa2

Assignments:

..Issuer: Iberdrola USA

.... Issuer Rating, Assigned Baa1

....Outlook, Negative

The principal methodologies used in these ratings was Regulated Electric and Gas Utilities published in December 2013 and Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ryan T Wobbrock
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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