Fitch Rates CECONY's $1B Sr. Unsecured Debentures 'A-'

Fitch Ratings has assigned an 'A-' rating to Consolidated Edison Company of New York's (CECONY) new 3.30% $250 million issue of senior unsecured debentures series 2014B due Dec. 1, 2024, and new 4.625% $750 million issue of senior unsecured debentures series 2014C due Dec. 1, 2054. The Rating Outlook is Stable. The new debentures will rank equally with CECONY's existing senior unsecured obligations. Net proceeds will be used for general corporate purposes, including repayment of short-term debt bearing interest at variable rates.

CECONY's ratings are driven by the stable earnings from its regulated electric and gas delivery businesses and a relatively balanced regulatory compact in New York. The ratings also recognize that credit metrics will be under pressure over the next several years due to an unfavorable outcome in the last rate proceeding, ongoing base rate freeze until 2016, and high levels of capex that will require sizeable external financing. Fitch forecasts CECONY's projected credit metrics will fall toward the lower range of the current rating level. Event risk from pending investigations into the East Harlem gas explosion and contractor investigations by the New York Public Service Commission (NYPSC) is also a concern. However, management believes insurance proceeds are sufficient to cover its exposure, although Fitch has not been able to verify the extent of the insurance coverage.

KEY RATING DRIVERS

Relatively Balanced Regulatory Compact: Regulatory mechanisms include full and timely recovery of fuel and commodity costs, forward-looking test years, multi-year rate plans, trackers for large operating expenses, and a revenue decoupling mechanism that isolates net margins from variation in sales.

CECONY's most recent rate decision resulted in a two-year electric base rate freeze through December 2015, and a three-year gas and steam base rate freeze through December 2016. The rate order was more punitive than Fitch's expectation. In Fitch's view, the intense public scrutiny and political backlash that surrounded the case in the aftermath of Hurricane Sandy heavily weighted the outcome of the rate case and was not, by itself, representative of a more challenging regulatory framework.

The NYPSC's REV proceeding was not a factor in the ratings. Fitch will continue to monitor the progress of the proceeding, which could lead to fundamental changes to the New York regulatory paradigm and rate design. In Fitch's view, by closely aligning state energy policy goals with utility regulation, the REV framework could minimize the political interference and public scrutiny that have characterized some of CECONY's rate cases in recent years. Implementation of the REV framework may also lead to greater regulatory predictability and reduced ratecase frequency through design of rate plans that span multiple years, in Fitch's view. The REV proceeding is running on two tracks, one focusing on policy issues, and a second one focusing on regulatory and ratemaking matters. Policy determinations are expected to be completed in second quarter 2015 (2Q'15).

Event Risk: At this time Fitch is unable to predict CECONY's potential cash flow exposure associated with the East Harlem gas explosion. On March 12, 2014, an explosion and related fire in East Harlem led to the collapse of two buildings. Eight people died and more than 48 were injured. The NYPSC is also conducting a separate investigation. Although no specific timeline has been established, Fitch would expect the NTSB to release a final report in 1Q'15. Management believes insurance policies in force at the time of the incident will cover the company's costs to satisfy any liability it may have for damages connected to the incident. Fitch's base case projections do not reflect any financial exposure associated with this incident.

The ratings assume no material cash flow effect from the NYPSC's prudence review of certain expenditures following the arrest of employees related to allegations of contractor kickbacks. A NYPSC consultant has estimated total overcharges of $208 million for CECONY. At Sept. 30, 2014, the utility had booked a regulatory liability of $36 million, based on its own estimate of potential cash flow exposure. CECONY is exploring a settlement with the NYPSC staff. In its Base Case projections, Fitch has assumed CECONY refunds approximately $40 million to customers in 2016.

Elevated Capex: Management expects capex to amount to approximately $7.05 billion over 2014-2016 compared to approximately $5.82 billion over the prior three years. Utility capital spending is earmarked primarily towards replacement of aged infrastructure, enhancement of network reliability, and system expansion, including heating oil to gas conversions of residential and commercial buildings in New York City, which management projects will support gas peak growth of 2.8% over the next five years. CECONY's capex also includes approximately $936 million of storm hardening projects through 2016. Infrastructure investment spending includes, as part of the Indian Point Contingency plan, approximately $371 million of transmission projects that are expected to be in service sometime in 2016 and 2017, with cost recovery to be determined in a future FERC proceeding.

Fitch expects CECONY's internally generated cash flows (after dividends) to support on average of 60% to 70% of capital spending over the forecast period, with the balance funded primarily with debt.

Credit Metrics Trending Downwards: Fitch forecasts CECONY's FFO-fixed charge coverage ratio to average near 4.8x and FFO lease-adjusted leverage near 4.2x over the forecast period. For the LTM period ended Sept. 30, 2014, FFO-fixed charge coverage was 4.4x and FFO lease-adjusted leverage, 2.9x. CECONY's ability to successfully control operating costs during the rate freeze period will be critical toward maintaining the existing rating level. Fitch believes CECONY will be filing an electric rate case sometime in 2015 for new rates to be effective Jan. 1, 2016. CECONY's success in receiving a balanced rate outcome will also be critical towards maintaining the current ratings.

Adequate Liquidity: Liquidity is supported by a shared bank credit facility that expires in October 2017. CECONY has access to a total of $2.25 billion under the credit facility through October 2016, and from then, approximately $2.1 billion through Oct. 2017. At Sept. 30, 2014, CECONY had $11 million of letters of credit outstanding under the credit facility, and $1,201 million of commercial paper outstanding. Cash and cash equivalents were $45 million. Consolidated debt maturities are considered manageable with $350 million due in 2015, $650 million due in 2016, and $1,200 million due in 2018.

RATING SENSITIVITIES

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:

--A significant deterioration in the New York regulatory compact illustrated by another less than favorable rate decision in CECONY's next rate proceeding;

--An adverse outcome associated with the investigation of the East Harlem gas explosion;

--A customer refund resulting from the NYPSC's prudence investigation of prior contracting practices that is materially higher than Fitch's current expectation. At Sept. 30, 2014, CECONY had collected an estimated $1,603 million from customers subject to potential refund;

--FFO-adjusted leverage greater than 5x on a sustained basis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);

--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=930895

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