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Rating Action:

Moody's downgrades Niagara Mohawk to Baa1; stable outlook

15 Oct 2021

London, 15 October 2021 -- Moody's Investors Service (Moody's) has today downgraded to Baa1 from A3 the long-term issuer and senior unsecured ratings of Niagara Mohawk Power Corporation (NiMo). Concurrently, Moody's has downgraded the preferred stock ratings to Baa3 from Baa2. The outlook has been changed to stable from negative.

This rating action follows the filing on 27 September 2021 by NiMo of a joint proposal [1] with the New York energy regulator, the Public Service Commission (PSC), of a three-year rate plan running from July 2021 to June 2024. It is envisioned that the PSC will approve the settlement in the coming months, with the new rate plan expected to apply from 1 January 2022. A true-up ("make-whole provision") will take account of the delay in implementing updated rates.

RATINGS RATIONALE

The rating downgrade reflects Moody's expectation that NiMo will exhibit weaker credit metrics, including cash flow from operations pre-working capital (CFO pre-W/C) to debt, over the period to June 2024. Moody's expects NiMo's CFO pre-WC/debt to be around 14-16%, excluding timing differences, as compared to 17-19% over the last three financial years. Timing differences, pertaining to the continued remittance, to customers, of cash collected on behalf of the New York State Energy Research and Development Authority (NYSERDA), $246 million at March 2021 , will likely mean NiMo's reported metrics are slightly weaker over this period.

Several factors incorporated in the proposal will contribute to the weaker financial metrics, including (1) growth in regulatory assets combined with a reduction in regulatory liabilities; and (2) the continuation of relatively low authorized ROE (9.0%) and thin equity layer (48%) in NiMo's assumed capital structure compared to other state regulated utilities operating outside of New York. A key driver of the joint proposal is the desire to limit rate increases for customers. Rate increases will be kept below 2% per annum in each year of the rate plan for both NiMo's electricity and gas operations through the amortization of regulatory liabilities, despite NiMo's ongoing large capital program.

The joint proposal expands the suite of reconciliation/deferral mechanisms, from an already strong base, enhancing cash flow predictability and increases the maximum potential uplift to achieved returns from earning adjustment mechanisms. Of the incremental measures, Moody's believes that the improved ability and timeliness for storm cost recovery, through an enlarged allowance in base rates for major storms coupled with the introduction of a new minor storm tracker and pre-staging cost mechanism, provides the greatest benefit. This reflects that New York is prone to severe weather events and the record number of 'minor' storms, along with the coronavirus pandemic, depressed NiMo's achieved return on equity for its electric operations (which account for around 80% of the company's rate base) to 6.3% in the financial year ending March 2021.

Nevertheless, despite these changes, Moody's continues to view the operating environment as challenging for NiMo and the other New York utilities. Over the past two to three years, political rhetoric and state actions taken towards various New York utilities have created a more uncertain and challenging operating environment for the state's utilities. Various issues around customer service quality (e.g., gas moratoriums, performance in storms and other unforeseen outages) have resulted in a myriad of fines for the state's utilities, although not, to-date, for NiMo. Additionally, the limited rate increases, in recognition of the financial impact of the coronavirus pandemic on customers, may cause rate pressure to build in future years, particularly if accompanied by a more material shortening in regulatory asset lives for NiMo's gas assets to align with the state's ambitious decabonisation agenda.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that (1) a rate settlement will be approved in the coming months by the PSC with only minor, if any, modifications; and (2) NiMo will maintain a financial profile over the 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

Given the downgrade, upward pressure on the ratings is not currently anticipated. However, NiMo's ratings could be upgraded if Moody's forecast NiMo's CFO pre-WC/debt to be above 18% on a sustainable basis.

The ratings could be downgraded if CFO pre-WC/debt appeared likely to fall persistently below 14%, excluding timing differences.

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.

Niagara Mohawk is a regulated electric and natural gas T&D utility, serving approximately 1.7 million electric and 0.6 million natural gas customers in upstate New York State, and is regulated by the New York Public Service Commission. Niagara Mohawk is ultimately owned by National Grid plc (Baa2 stable) and is the group's largest US regulated subsidiary with a rate base of around $7.7 billion at March 2021.

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_1288435.

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] https://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={03E0246C-C385-4591-8CC5-A37DCD1152F5}

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
Vice President - Senior 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

Paul Marty
Senior Vice President/Manager
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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