Fitch Downgrades Iberdrola USA, Inc. and Affirms Subsidiary Ratings

Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Iberdrola USA, Inc. (IUSA) to 'BBB' from 'BBB+' and concurrently assigned a senior unsecured debt rating of 'BBB'. In addition, Fitch has affirmed the IDRs for subsidiary companies New York State Electric & Gas Corp. (NYSEG), Rochester Gas & Electric Corp. (RG&E) and Central Maine Power Co. (CMP). Short-term IDRs of 'F2' have been assigned to NYSEG and CMP. A short-term IDR of 'F3' has been assigned to RG&E. The Rating Outlooks for all issuers is Stable.

Key Rating Drivers

--Low-risk business profile due to ownership of regulated transmission and distribution utilities

--Stable utility cash flow metrics supported by balanced regulatory treatment

--Execution of separate IUSA and joint operating company bank credit facilities

--Moderate parent company debt totaling $650 million (inter-company notes)

--Fitch no longer factors in financial or liquidity support to IUSA from Iberdrola, S.A.

Iberdrola USA Rating Rationale

The downgrade reflects Fitch's view of IUSA's stand-alone credit quality, whereas the prior rating received a one-notch uplift from its ownership by Iberdrola, S.A. (Fitch rated IDR 'A-'; on Rating Watch Negative). Fitch no longer believes the ratings uplift to be warranted. This is because Fitch is of the view that IUSA will require more limited support going forward based on an expected improving financial profile and the greater likelihood that capital flows will move from IUSA to Iberdrola, S.A. Fitch models existing inter-company notes due to Iberdrola, S.A. to be repaid at stated maturity, $300 million due in 2013 and $350 million due in 2019.

Fitch's stand-alone rating of IUSA at 'BBB' is supported by ownership of three low-risk regulated transmission and distribution utilities, the beneficial treatment of its moderate inter-company debt and, execution of external bank credit facilities.

While Iberdrola, S.A.'s exposure to sovereign pressure is viewed as moderate by Fitch, supported by a good degree of geographical earnings diversification and a strong liquidity position, it may also be less inclined to provide direct financial support to IUSA in the context of a potential protracted worsening of the Eurozone crisis, the weak economic backdrop in Spain, and likely pending sector specific provisions targeted at reducing Spain's electricity deficit.

Fitch considers effective cost management and continuation of balanced regulatory treatment at the three utilities as key to maintaining credit quality. The liquidity profile is sound with independent credit facilities for IUSA and the regulated subsidiaries.

Utility Rating Rationales

Primary drivers of the NYSEG and RG&E rating affirmations are regulatory certainty through 2013, and fairly stable utility service territories. Fitch's forecasts incorporate distribution rate increases through 2013, as awarded in the September 2010 settlement and efficiency initiatives accomplished through headcount reductions that started in 2009, both of which are sustainable drivers of earnings through 2013. Inclusion of a revenue decoupling mechanism in the rate settlement mitigates volatility in sales volumes over the forecast period. Capital spending will remain moderate, and debt maturities are manageable.

Financial metrics at NYSEG are consistent relative to Fitch's guidelines for the 'BBB+' rating category, with EBITDA to interest forecast above 4.5x in 2012, and FFO to debt forecast near 20% through 2013.

Financial metrics at RG&E are forecast to improve, with EBITDA to interest forecast near 3.7x and FFO to debt forecast to be higher than 18% through 2013. Fitch could consider positive rating action if the utility achieves sustainable financial metrics of EBITDA to interest above 4.0x and FFO to debt stays above 18%. Fitch considers effective cost management at both NYSEG and RG&E as key to maintaining stable credit profiles.

The affirmation of the CMP rating is supported by solid utility financial metrics. Fitch's forecast incorporates higher levels of long-term debt to fund the multi-year transmission build-out plan, 'Maine Power Reliability Project' (MPRP). The bulk of the MPRP construction is to occur in 2011 - 2013, with the transmission rate base planned to grow from $426 million in 2010 to $1.2 billion in 2013. The negative impact of higher debt levels on financial metrics is largely mitigated by the favorable rate treatment at the FERC and 100% CWIP in rate base.

Fitch considers adherence to the project completion schedule and budget, as well as timely recovery of project costs are key drivers to maintaining a solid utility credit profile.

Sufficient Liquidity Position

Execution of separate IUSA and joint operating company bank credit facilities support the stable stand-alone credit profiles. Consolidated bank credit facility capacity is $900 million, of which $426 million was available April 10, 2012. IUSA is currently renewing its $300 million stand-alone bank credit facility, and the three utilities have a joint $600 million bank credit facility, with respective sub-limits of $200 million for NYSEG, $100 million for RG&E and $300 million for CMP, which expires in July 2016.

Fitch has downgraded the following:

IUSA

--IDR at to 'BBB' from 'BBB+'

Fitch has assigned the following:

IUSA

--Senior Unsecured Debt at 'BBB'

NYSEG

-- Short-term IDR at 'F2'

RG&E

-- Short-term IDR at 'F3'

CMP

-- Short-term IDR at 'F2'

Fitch has affirmed the following:

NYSEG

--IDR at 'BBB+'

--Senior Unsecured Debt at 'A-'

--Preferred Stock at 'BBB'

New York State Energy Research & Development Authority (NY) (New York State Electric & Gas Corp. Project)

--Pollution Control Revenue Bonds at 'A-'

RG&E

--IDR at 'BBB-'

--Senior secured debt at 'BBB+'

-- Senior unsecured debt at 'BBB'

CMP

--IDR at 'BBB+'

--Senior secured debt at 'A'

--Senior unsecured debt at 'A-'

--Preferred Stock at 'BBB'

The Rating Outlooks remain at Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria available and related research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011);

--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677735

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

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