NEW YORK--()--Fitch Ratings has assigned an 'A' rating to Connecticut Light and Power Co.'s (CL&P) $400 million issuance of 2013 series A 2.50% first and refunding mortgage bonds due Jan. 15, 2023. Proceeds will be used to repay outstanding short-term debt. The notes will rank on parity in right of payment with all the existing and future senior secured debt. The Rating Outlook for CL&P is Stable.
Stable Outlook: The rating of CL&P and Stable Outlook reflect the beneficial support of a stronger Northeast Utilities (NU; IDR 'BBB+', Stable Outlook) following the merger of NSTAR into NU. Fitch's assessment of the utility addresses the issues of storm recovery and sizeable capital investments in transmission projects.
Key Rating Drivers:
--Low-risk business profile with cash flows derived from regulated electric transmission and distribution operations;
--Effective cost management and the ability to achieve expected cost synergies throughout the rate freeze period;
--Uncertain amount of ultimate storm cost recovery;
--Greater financial flexibility and improved funding capabilities of the parent company;
--Sizeable capital investment plan focused on transmission projects;
--Manageable debt re-financings.
Financial Metrics: Fitch expects weakening financial metrics in the near term and forecasts EBITDA-to-interest to remain above 4.5 times and funds from operations (FFO)-to-debt to range between 14% and 17% through 2014. Fitch attributes the expected earnings deterioration to several factors including: carrying costs associated with storms in 2011; a one-time $25 million customer rate credit in 2012; and, a base distribution rate freeze through 2014. Fitch considers effective cost management and an ability to achieve cost synergies throughout the rate freeze period as material to a stable credit profile.
As part of the merger settlement with Connecticut, the utility agreed to write-down $40 million of its $263 million deferred storm related costs. Allowed costs are to be recovered over a six-year period beginning Dec. 1, 2014, and the ultimate amount of recovery remains uncertain. Not included in the rating forecast are costs incurred in 2012 related to super storm Sandy.
Sizeable Capital Investment Plan: Capital expenditures are expected to remain elevated reflecting utility investments in regional transmission projects which are FERC-regulated and eligible for solid rates of return. Fitch considers balanced funding and timely cost recovery as material to a stable credit profile.
Adequate Liquidity: The consolidated liquidity position for NU at Sept. 30, 2012 was $614 million, including $73 million in cash on hand. Total consolidated borrowing capacity is $1.9 billion. In July 2012, NU replaced a combined $1.15 billion in borrowing capacity with a new $1.15 billion five-year bank credit facility at NU. The new facility serves as back-up to a new $1.15 billion commercial paper program.
With the execution of the new NU facility the company terminated the $400 million joint operating bank credit facility on which CL&P was a named borrower, amongst other bank borrowing agreements. The balance of current consolidated borrowing capacity includes a $300 million revolver at CL&P which will expire in March 2017 and a $450 million revolver at NSTAR Electric (IDR 'A', Stable Outlook) which will expire in July 2017. The stand-alone borrowing capacity at CL&P supplements financing flexibility at the utility, a development which Fitch views positively in consideration of higher utility capital spending levels and uncertainty as to the amount of storm costs the utility will ultimately recover. CL&P had no money drawn on the $300 million revolver at Sept. 30, 2012.
Manageable Debt Re-Financings: CL&P's long-term debt maturities (excluding mandatory tenders) are manageable with $0 due in 2013, $150 million due in 2014, $100 million due in 2015 and $0 due in 2016. Fitch considers the re-financing risk as low and views CL&P's access to the capital markets as unrestricted.
Positive Rating Trigger: Issues related to storm cost recovery and execution of a sizeable utility capital investment plan limit positive rating action at this time.
Negative Rating Trigger: An inability to manage costs and achieve expected costs synergies during the rate freeze period could adversely affect the utility's credit metrics for a sustained period and lead to a ratings downgrade.
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:
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Corporate Rating Methodology', Aug. 8, 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:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating North American Utilities, Power, Gas, and Water Companies