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Rating Action:

Moody's downgrades National Grid's two utilities in downstate New York; outlook stable

04 Jun 2021

London, 04 June 2021 -- Moody's Investors Service (Moody's) has today downgraded the long-term issuer and senior unsecured ratings of KeySpan Gas East Corporation (KEDLI), to Baa1 from A3, and The Brooklyn Union Gas Company (KEDNY), to Baa2 from Baa1. Concurrently, Moody's has changed the outlook on both KEDLI and KEDNY to stable from negative.

The two regulated utilities, local gas distribution companies (LDCs) serving customers in "downstate" New York, are ultimately owned by National Grid plc (National Grid, Baa2 stable).

This rating action follows the 14 May 2021 filing by the companies of their joint proposal (proposed rate case settlement) [1] with the New York energy regulator, the Public Service Commission (PSC), for a three year rate plan running from April 2020 -- March 2023. It is envisioned that the PSC will approve the settlement in August with the new rate plan applying retrospectively from 1 August 2021. A true-up ("make-whole provision") will take account of the delay in implementing updated rates.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE OF RATINGS

The downgrades reflect Moody's expectation that KEDLI and KEDNY will not demonstrate financial metrics commensurate with the previous A3 and Baa1, respectively, rating levels over the period to March 2024.

Despite both KEDLI and, particularly, KEDNY undertaking large capex programmes in recent years, both companies have been granted only modest rate increases under the proposed rate case settlement. Rate increases are 0% in rate year 1 (April 2020 -- March 2021) and around 2% in rate years 2 and 3. Significant rate levelisations, through the utilisations of credits; and the continuation of allowed returns below the levels for US distribution utilities operating outside New York, due to the preservation of a thinner equity layer and a cut in allowed return on equity (ROE), moderated the extent of rate increases.

Moody's expect KEDLI and KEDNY to maintain cash flow from operations pre-working capital (CFO pre-W/C) to debt of around 16% and 14% respectively over the next three financial years (ending March 2022 to March 2024, FY2022-24), as compared to the rating agency's minimum guidance for the Baa1 and Baa2 rating levels of 15% and 13% respectively. The joint proposal will see a narrowing of the differential in financial profile of the two LDCs, though KEDLI will remain stronger.

In recent years, KEDNY has exhibited a much weaker financial profile than KEDLI, and the weakest amongst National Grid's US regulated businesses, as evidenced by CFO pre-W/C/debt averaging 10% over FY2018-20, compared to 19% for KEDLI over the same period. In Moody's view, KEDNY's cash flow metrics were depressed by its (1) very large capex programme, with capex (incl. cost of removal) averaging 20% of rate base over the last four financial years; and (2) weak operating performance -- achieved ROE averaged 7.4% compared to 9.5% for KEDLI and authorized ROE under the current plan of 9.0%. Moody's expects the higher operating cost allowances and the fall in annual capex requirements under the new rate plan will support a modest improvement in KEDNY's financial profile. Conversely, KEDLI's financial profile will be weakened by (1) a cut in operating cost allowances; (2) a continuation of elevated capex requirements; and (3) the cessation of support to cash flow metrics from the back-loading of rate increases in the current rate plan.

Social considerations are incorporated into the rating action as Moody's believes it was the desire to moderate consumer bill increases, in the context of the pandemic, that prolonged settlement discussions and resulted in the significant rate levelisations through the utilisation of regulatory liabilities (deferred credits), particularly at KEDNY (-$17m Rate Year one [RY1]; -$24m RY2; and -$54m RY3). The settlement allows for a shortening of assumed asset lives for a portion of KEDLI's assets, accelerating cashflows and reducing the stranding risk for the gas assets. However, even with the slight shortening in KEDLI's regulatory asset life, we expect depreciation as a proportion of rate base to be around 3% - below the level of National Grid's other US subsidiaries. Moody's considers that KEDNY has less flexibility than KEDLI to accelerate cash flows in future rate case settlements as KEDNY will incur significant additional costs in rectifying contaminated sites which places additional upward pressure on rates.

KEDLI's and KEDNY's Baa1 and Baa2 ratings also factor in Moody's assessment that, as gas companies, KEDLI and KEDNY have a higher business risk profile than, for example, electric utilities in the state given an ambitious decarbonisation agenda and modest funding for energy transition projects (other than for leak prone pipe). Finally, KEDNY's financial profile, whilst still weak, has been bolstered by its parent company (National Grid USA, Baa2 stable) making several equity injections into the company in recent years in support of its large capital investment program. This has moderated the extent of the increase in KEDNY's leverage and ensure its gearing stayed closely aligned with regulatory assumptions.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that (1) a rate case settlement will be enacted in summer 2021 which contains no material changes to the joint proposal filing; and (2) both KEDLI and KEDNY will maintain a financial profile over the remaining primary term of this rate plan in line with guidance for the current rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward rating pressure is not currently anticipated for either KEDLI or KEDNY. However, upward rating pressure for KEDLI could arise if the company was expected to consistently exhibit CFO pre-WC to debt of at least 19% and political intervention moderated. Upward pressure for KEDNY could arise if the company was expected to consistently exhibit CFO pre-WC to debt of at least 15% and political intervention moderated.

Downward rating pressure on KEDLI's ratings could arise if, following the forthcoming rate case settlement, Moody's did not expect the company to exhibit CFO pre-WC to debt of at least 15% under the rate plan. Given National Grid's track record of supporting KEDNY in recent years, Moody's does not presently anticipate that the rating of KEDNY will fall more than one notch below the consolidated credit quality of the National Grid group, currently Baa1. Consequently, downward rating pressure would require (1) KEDNY's CFO pre-WC to debt to be persistently below 13%, due to weak operating performance, and (2) a deterioration of the consolidated credit quality of the National Grid group which is not currently expected.

KEDLI and KEDNY are local distribution company (LDC) engaged in the transportation and sale of natural gas to around 1.9 million customers in "downstate" New York. Both companies are regulated by the New York Public Services Commission (NYPSC) and are ultimately owned by National Grid plc (Baa2 stable) via intermediate holding companies National Grid North America Inc. (Baa2 stable) and National Grid USA (Baa2 stable). KEDLI and KEDNY had a combined rate base of $8.1 billion at 31 March 2021, almost 30% of National Grid's rate base in the US and around 14% of the National Grid group's total regulated assets.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=(049A7777-4BE8-41FC-B958-6D9EE1C13DD3)

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.

Philip Cope
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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