NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the existing IDRs and instrument ratings of Northeast Utilities (NU, 'BBB+' IDR) and its subsidiaries, The Connecticut Power and Light Co. (CL&P, 'BBB+' IDR), NSTAR Electric Co. (NSTAR, 'A' IDR), Public Service Co. of New Hampshire (PSNH, 'BBB+' IDR), Western Massachusetts Electric Co. (WMECO, 'BBB+' IDR) and NSTAR Gas Co. ('A-' IDR). The Rating Outlook is Stable for each entity. A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS
Northeast Utilities
Conservative Business Model: NU owns six regulated electric and natural gas distribution utilities operating in three states that provide a relatively predictable earnings and cash flow stream. Importantly, the Federal Energy Regulatory Commission (FERC) is the largest of NU's four regulatory jurisdictions accounting for 33% of 2013 year-end rate base compared to 29% in Connecticut, 26% in Massachusetts and 12% in New Hampshire. Planned transmission investments are expected to grow the FERC rate base to 41% by 2017. Fitch considers FERC regulation to be among the most constructive in the sector reflecting higher allowed returns, the inclusion of construction work in progress (CWIP) in rate base and timely recovery of invested capital.
Solid Utility Financial Profiles: Each of the five Fitch-rated utility subsidiaries has a sound financial profile that is either stable or improving. The expected improvements reflect a combination of annual increases in transmission tariffs, declining operating and maintenance expenses (O&M), modest sales growth and the expiration of merger related costs and rate freezes.
Low Risk Growth Strategy: NU is pursuing a relatively low risk growth strategy. Planned capex over the next four years is $7.6 billion, including $3.7 billion in FERC regulated transmission. The remainder of capex is distribution infrastructure, including expansion of the natural gas delivery business in Connecticut as per legislation that also receives timely recovery.
Cost Saving Opportunities: The merger with NSTAR completed in April 2012 provides significant cost saving opportunities by standardizing operating procedures, adopting best practices and exploiting greater purchasing power. Prior to the merger each subsidiary operated independently with separate service centers, call centers, compensation packages and benefit programs. Management expects to lower O&M by approximately 3%-4% annually through 2017. Lower pension expense due to rising interest rates also contributes to the O&M reductions. The O&M reductions will benefit earnings and cash flow through the respective rate freeze periods and then moderate future revenue requirements.
Limited Commodity Exposure: Each of NU's six core subsidiaries are distribution utilities with limited commodity exposure. Only PSNH owns any meaningful amount of electric generation and all costs are recovered from rate payers through an annual adjustment mechanism. Increase customer switching that shifts a larger cost burden on remaining PSNH standard service customers is a credit concern and has prompted a regulatory docket to consider whether PSNH should sell its remaining fossil fleet.
Rate Freezes: CL&P is subject to a base rate freeze through Dec. 1, 2014 and the three Massachusetts utilities through 2015. PSNH is operating under a 2010 settlement agreement that extends through June 30, 2015. Management expects to file a CL&P rate case in late spring to be effective immediately following the rate freeze period. Given the expected O&M reductions rate needs are expected to be modest. By staying out of the rate arena, the NU subsidiaries are able to retain any cost savings until the next rate decision. In addition, the companies will continue to adjust FERC transmission rates and distribution rates for a number of tracking mechanisms.
Decoupling: Legislation enacted in Connecticut requires the Public Utility Regulatory Commission (PURA) to implement decoupling for each of its electric and natural gas utilities in their next respective rate filings. WMECO already has decoupling and NSTAR Electric expects to request decoupling in its next rate case as per Massachusetts requirements.
FERC Investigation: In August 2013 a FERC ALJ issued an initial decision in a complaint filed by several New England attorneys general, regulatory commissions and others alleging the FERC base ROE of 11.14% is excessive. The ALJ determined the base ROE should be 10.6% for the refund period (Oct. 1, 2011 - through Dec. 31, 2012) and 9.7% prospectively. At the time of the ruling Treasury rates were approximately 100 basis points lower than the current rate.
The potential refund impact is not material for NU. To reflect the ALJ position, NU recorded a $14.3 million charge in 2013 ($7.7 million at CL&P, $3.4 million at NSTAR, $1.4 million at PSNH and $1.8 million at WMECO). A final decision is expected in the second half of 2014. Management believes a reduction in the prospective ROE to 9.7% would lower earnings over the next four years by an approximately $33 million.
Storm Costs Recovery: Connecticut Light and Power Co. (CL&P) and NSTAR Electric each received constructive rate decisions over the past few months related to storm cost recovery that will benefit earnings and cash flow over the next several years. In March 2014, PURA approved recovery of $365 million of CL&P storm costs plus interest over six years. Total storm costs aggregated $462 million. Previously CL&P agreed to forgo recovery of $40 million of storm costs. In December 2013 NSTAR Electric was authorized to recover $34.2 million of storm costs compared to the $38 million requested.
Natural Gas Expansion: In June 2013, Yankee Gas (not rated by Fitch) filed a plan to add 82,000 gas customers in response to H.B. 6360 that corresponds to the Governor's Comprehensive Energy Plan. The legislation provides for the timely recovery of the incremental capital investment and allows the utilities to secure additional pipeline capacity into Connecticut. The plan includes $700 million of capex over 10-years, including $191 million over the next four years.
RATING SENSITIVITIES
Positive: Given the current rate freezes in Connecticut and Massachusetts and large capex program, positive rating action is not expected in the near-term.
Negative: Adverse regulatory outcomes pose the greatest risk to ratings. Fitch could downgrade ratings if fixed charge coverage were to fall below 4.5x on a sustained basis.
Connecticut Light and Power Co.
Rating Drivers
--Low-risk business profile with cash flows derived from regulated electric transmission and distribution operations;
--Solid financial profile;
--Cost saving opportunities mitigate rate freeze and moderate future rate requirements;
--Constructive storm cost recovery allowed in March 2014;
--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: Credit quality measures improved considerably in 2013 and are expected to continue to improve over the next few years due to increasing FERC regulated transmission rates, merger related cost synergies, expiration of the rate freeze and the absence of merger related costs. Fitch expects the ratio of debt/EBITDAR to be below 3.75x and EBITDAR/interest in excess of 5.0x.
Sizeable Capital Investment Plan: Capital expenditures are expected to remain elevated due in large part to significant investments in FERC regulated regional transmission projects that receive timely cost recovery and above average returns. Forecasted transmission capex is $789 million over the next four years, an increase of approximately 25% over the prior four-year period. A moderate rise in distribution expenditures is also likely. Fitch considers balanced funding and timely cost recovery as material to a stable credit profile.
Storm Cost Recovery: In March 2014, the Connecticut Public Utility Regulatory Authority (PURA) approved recovery of $365 million of storm costs over six years. Total storm costs aggregated $462 million. Previously CL&P agreed to forgo recovery of $40 million of storm costs.
Rate Freeze: As part of the merger approval CL&P's rates are frozen through Dec. 1, 2014. The company plans to file a rate increase in the spring to be effective immediate after the rate freeze expires. The rate request is expected to be moderate given the expected cost reductions. The next rate filing is expected to in include a decoupling mechanism as per Connecticut legislation.
RATING SENSITIVITIES
Positive: Fitch does not envision positive rating change during the current rate freeze period and high capex cycle. Over time, however achieving the targeted cost reductions and lowering leverage as measured by Debt/EBITDAR below 3.4x on a sustained basis could lead to higher ratings.
Negative: Adverse regulatory outcomes that increase leverage pose the greatest risk to ratings. Ratings could be lowered if debt/EBITDAR exceeded 4.0x on a sustained basis.
NSTAR Electric
KEY RATING DRIVERS:
--Low risk business profile;
--Strong financial metrics;
--Cost control opportunities mitigate effects of rate freeze;
--Sizeable capital investment plan focused on transmission projects.
Strong Financial Metrics: Fitch expects financial metrics to remain strong for the current rating level due to increasing FERC related transmission rates, merger related cost synergies, expiration of the rate freeze and the absence of merger related costs. Fitch expects the ratio of debt/EBITDAR to average about 3.0x over the next several years and EBITDAR/interest to be well in excess of 6.5x.
Rate Freeze: As a condition to merger approval NSTAR Electric agreed to a 44-month distribution base rate freeze, with the earliest date for new distribution rates Jan. 1, 2016. Fitch considers cost control and achieving merger-related cost synergy targets as key to maintaining a stable credit profile. Existing tracking mechanisms remain in effect during the rate freeze period.
Sizeable Capital Investment Plan: Capital expenditures are expected to remain elevated due in large part to significant investments in FERC regulated regional transmission projects that receive timely cost recovery and above average returns. Forecasted transmission capex is $928 million over the next four years. Fitch considers balanced funding and timely cost recovery as material to a stable credit profile.
Storm Cost Recovery: In December 2013 NSTAR Electric was authorized to recover $34.2 million of storm costs from Tropical Storm Irene compared to the $38 million requested. Previously, the merger settlement provided for recovery of $39 million in deferred 2011 storm costs over a five-year period starting Jan. 1, 2014. Approximately $91 million of additional storm costs have been deferred for future recovery.
RATING SENSITIVITIES
Positive: Fitch deems positive rating change unlikely during the current rate freeze period and high capex cycle.
Negative: Given NSTAR's strong position within its current rating negative rating action is not expected in the near-term.
Public Service Company of New Hampshire
KEY RATING DRIVERS:
--Low-risk business profile;
--Solid financial metrics;
--Balanced regulatory treatment;
--Impact of customer switching
Strong Financial Metrics: Fitch expects financial metrics to remain strong for the current rating level due to increasing FERC related transmission rates, merger related cost synergies, and the absence of merger related costs. Fitch expects the ratio of debt/EBITDAR to average about 3.0x over the next several years and EBITDAR/interest to be well in excess of 6.5x.
Balanced Regulatory Treatment: Fitch considers the regulatory environment in New Hampshire to be balanced. PSNH is currently operating under a five-year distribution rate settlement agreement effective through July 2015. As part of the agreement PSNH implemented a $12.6 million rate increase effective July 1, 2013. Temporary rates also took effect in April 2012, reflecting approximately two-thirds of the $421 million cost to install a scrubber at the Merrimack coal plant.
Customer migration: The increased pace of retail customer switching remains a concern for Fitch as the cost of maintaining the company's generation assets falls on a smaller customer base. Consequently, the legislature has requested an analysis to determine whether it is in the interest of retail customers to divest the generation. Current ratings assume PSNH would be held harmless from any disposition of the generating assets.
RATING SENSITIVITIES
Positive: Fitch believes positive rating movement is unlikely during prior to a resolution of the pending investigation with respect to PSNH's generating assets.
Negative: Given PSNH's strong position within its current rating a downgrade is not likely in the near-term.
Western Massachusetts Electric Company
KEY RATING DRIVERS:
--Low risk business profile;
--Solid;
--Small size
--Cost control opportunities mitigate effect s of rate freeze;
--Moderate investment plan focused on transmission projects.
Solid Financial Metrics: Fitch expects financial metrics to remain supportive of the current rating level due largely to increasing FERC related transmission rates and merger related cost synergies. Fitch expects the ratio of debt/EBITDAR to average about 3.65x over the next several years and EBITDAR/interest to be well in excess of 6.0x.
Rate Freeze: As a condition to merger approval WMECO's distribution base rates are frozen through Dec. 31, 2015. Fitch considers cost control and achieving merger-related cost synergy targets as key to maintaining a stable credit profile. Existing tracking mechanisms remain in effect during the rate freeze period.
Moderate Capital Investment Plan: Capital expenditures declined significantly in 2013 primarily due to a decline in transmission spending and are expected to remain moderate over the next several years. Forecasted transmission capex of approximately $209 million over the next four years are well below the prior four year period. Fitch considers balanced funding and timely cost recovery as material to a stable credit profile.
RATING SENSITIVITIES
Positive: Not likely during rate freeze period. Upgrade also restricted by small size.
Negative: Adverse regulatory outcomes that increase leverage pose the greatest risk to ratings. Ratings could be lowered if debt/EBITDAR exceeded 3.75x on a sustained basis.
NSTAR Gas
KEY RATING DRIVERS:
--Low risk business profile;
--Solid financial profile;
--Small size
Low Risk Distribution Operations: NSTAR Gas is a pure distribution company with no commodity price risk and operates with a decoupling mechanism that eliminates volume risk.
Solid Financial Metrics: Fitch expects financial metrics to solid within the current rating level. Fitch expects the ratio of debt/EBITDAR to average about 3.5x over the next several years and EBITDAR/interest to be well in excess of 5.0x.
RATING SENSITIVITIES
Positive: Not likely during rate freeze period.
Negative: Adverse regulatory outcomes that increase leverage pose the greatest risk to ratings.
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Northeast Utilities
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Short-term IDR and Commercial paper at 'F2'.
Connecticut Light and Power Co.
--Long-term IDR at 'BBB+;
--Senior secured debt and revenue bonds at 'A';
--Senior unsecured debt and revenue bonds at 'A-';
--Preferred stock at 'BBB';
NSTAR Electric Co.
--Long-term IDR at 'A';
--Senior unsecured debt at 'A+';
--Preferred stock at 'A-'
--Short-term IDR and Commercial paper at 'F1'.
Public Service Co. of New Hampshire
--Long-term IDR at 'BBB+';
--Senior secured debt and revenue bonds at 'A'.
Western Massachusetts Electric Co.
--Long-term IDR at 'BBB+';
--Senior unsecured debt and revenue bonds at 'A-';
NSTAR Gas Co.
--Long-term IDR at 'A-';
--Senior secured debt at 'A+'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826327
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