NEW YORK--()--Fitch Ratings rates at 'A-' Western Massachusetts Electric Co.'s (WMECo) $150 million issuance of 3.50% senior unsecured notes, Series F due Sept. 15, 2021.
Proceeds will be used to repay short-term borrowings, and for general corporate purposes. The notes will rank on parity in right of payment with all of WMECo's existing and future senior unsecured debt. The Rating Outlook for WMECo is Stable.
Stable Credit Profile: The rating of WMECo reflects the low-risk nature of its regulated transmission and distribution operations, which deliver consistent cash flow metrics due in large part to balanced regulatory treatment. The rating also takes into consideration the support and improved funding capabilities of a stronger parent company profile following the merger of Northeast Utilities (IDR rated 'BBB+' with a Stable Outlook by Fitch) and NSTAR LLC (formerly NSTAR, IDR rated 'BBB+' with a Stable Outlook).
Financial metrics are consistent with Fitch guidelines for the rating and risk profile. Fitch forecasts WMECo's EBITDA to interest to come in above 5 times (x) and FFO to debt to range between 14%-18% through 2014. Projected credit measures include merger-related regulatory conditions such as a one-time non-recoverable $3 million customer rate credit and a 44-month base distribution rate freeze.
Utility financial metrics improved substantially following a 2011 distribution rate case settlement. As such, Fitch expects further improvement as transmission projects come on-line. WMECo will derive approximately 60%-70% of EBITDA from transmission starting following completion of projects in 2013. The ability to realize cost savings and control other costs will be critical to maintaining utility credit quality during the distribution rate freeze period.
Balanced Regulatory Treatment: Fitch views the inclusion of distribution rate order features as supportive of credit quality. These features include a revenue decoupling mechanism, pension trackers, timely recovery of costs related to fuel supply, energy efficiency and storms.
Liquidity Position and Funding Needs: Fitch considers WMECo's liquidity position adequate. Total available borrowing capacity on the $400 million joint operating company bank credit facility at June 30, 2012 was $165 million.
In July of this year, Northeast Utilities replaced a combined $1.15 billion in borrowing capacity with a new $1.15 billion five-year bank credit facility at NU that will expire in July 2017. Northeast Utilities concurrently terminated the $400 million joint operating company bank credit facility, on which they were named a borrower and had a borrowing sub-limit of $200 million. The WMECo sub-limit on the new $1.15 billion bank credit facility is $300 million.
Utility funding needs are moderate, with near-term debt re-financings of $55 million in 2013 and $50 million in 2015. WMECo's five-year capital plan of approximately $750 million is focused primarily on transmission system improvements and reliability projects.
Negative Rating Action Trigger:
--An inability to manage costs during the base distribution rate freeze period could negatively affect WMECo's financial position and put pressure on the ratings.
--An inability to earn an adequate and timely return on invested capital.
Positive Rating Action Trigger:
--Fitch does not envision positive rating actions for WMECo at this time.
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 and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Rating North American Utilities, Power, Gas, and Water Companies