Fitch Ratings Affirms KeySpan At 'A-'.
NEW YORK--(BUSINESS WIRE)--March 28, 2003
KeySpan Corp.'s (KeySpan) senior unsecured debt and debt shelf registration are affirmed at 'A-' b Fitch Ratings. In addition, Fitch affirmed the 'A+' rating for Brooklyn Union Gas Company (Brooklyn Union) senior unsecured debt and downgraded to 'A-' from 'A' its rating for the senior unsecured debt of KeySpan Gas East Corp. Brooklyn Union and KeySpan Gas East are natural gas utility subsidiaries of KeySpan and operate under the names of KeySpan Energy Delivery New York and KeySpan Energy Delivery Long Island, respectively. The Rating Outlook is Stable.
KeySpan's rating and Stable Outlook recognize its current and prospective near-term credit profile, the strength and predictability of its core natural gas distribution and electric generation operations, and the progress that has been made to date in reducing consolidated company and parent company debt with the proceeds from asset sales and equity offerings. Fitch also considers the ongoing company efforts to sell non-core energy investments to further de-leverage its balance sheet and reduce debt levels to a range that is more consistent with its current rating. Further considerations are the mixed performance from its non-regulated energy services segment and the structural subordination of KeySpan to the cash flow and debt of its regulated and non-regulated energy operations and investments. KeySpan relies on these companies as its primary source of cash to service its debt and pay dividends.
KeySpan's gas distribution segment consists of six utilities serving approximately 2.5 million customers in New York and New England. The gas utilities are generally low-risk businesses which on a combined basis generated 57% of 2002 earnings before interest and taxes (EBIT). In addition, KeySpan is the largest electric generator in New York State. Of its 6,400 megawatt generation portfolio, two-thirds is under long-term contract with 'A-'-rated Long Island Power Authority. The remaining one-third is favorably located in New York City. The electric generation segment produced 30% of 2002 EBIT. Less successful and less predictable is the company's non-regulated energy services segment which operated at a loss in 2001 and 2002. KeySpan also has a mix of energy investments including natural gas exploration and production, domestic pipelines and storage facilities, gas processing in Canada, and gas distribution and pipeline operations in the U.K.
During 2002 and the first quarter of 2003, KeySpan sold EnergyNorth Propane Co., Midland Enterprises Inc., certain joint venture gas assets, and 10% of its ownership interest in The Houston Exploration Co. (THX). The sales generated cumulative net cash proceeds of $285 million and reduced debt by $430 million. In addition, KeySpan sold $480 million of common stock and $460 million of equity units (MEDS) that include a committed forward purchase of common stock in 2005. As a result, consolidated company debt-to-capital has dropped from 66% at the beginning of 2002 to 58% in March 2003. While KeySpan's capital structure is still weak for the rating category, the anticipated sale of non-core investments will reduce debt to more appropriate levels. Cash flow driven credit measures including, funds from operations coverage of interest of 4.1 times (x) in 2002, are generally consistent with KeySpan's rating and are expected to remain adequate with or without the sale of additional assets.
The affirmation of Brooklyn Union's 'A+' rating primarily reflects its strong stand alone credit profile and a balanced regulatory environment in New York State. Brooklyn Union also benefits from access to low-cost tax-exempt financing. The one-notch downgrade of KeySpan Gas East's debt to 'A-', reflects weaker than anticipated credit measures. While KeySpan Gas East's service territory has favorable long-term growth potential and the company benefits from many of the same regulatory provisions as Brooklyn Union including, weather normalization and full recovery of gas costs, it has been capitalized with significantly more debt. Fitch expects that for the next several years its debt-to-capital ratio will approximate the 58% limit imposed by the New York Public Service Commission. Interest coverage ratios are also weaker than expected. KeySpan Gas East's debt is guaranteed by KeySpan and, therefore, it is not expected to be rated any lower than its parent.