Fitch Affirms Eversource and Subs' Rtgs; Outlook on CL&P, PSNH & WMECO Revised to Positive
In addition, Fitch has revised the Rating Outlook on CL&P, PSNH, and WMECO to Positive from Stable.
The Rating Outlook on ES, NSTAR Electric, and NSTAR Gas remains Stable.
CL&P Positive Outlook Revision:
The Outlook revision to Positive reflects the expectation of continued financial improvement due to a base rate increase effective December 2014, increasing transmission revenue, and Fitch's expectation of ongoing operational efficiencies and reductions in operating and maintenance expense (O&M). CL&P's transmission investments have resulted in approximately 44% of the utility's rate base being regulated by the Federal Energy Regulatory Commission (FERC), which Fitch considers to be among the most constructive regulatory jurisdictions. CL&P's percentage of rate base from FERC-regulated transmission assets is expected to remain strong, given planned capex over the next four years.
Fitch would likely upgrade CL&P's IDR and instrument ratings one notch if CL&P is able to achieve its targeted cost reductions and improve its adjusted debt/EBITDAR below 3.5x on a sustainable basis.
PSNH Positive Outlook Revision:
The Outlook revision to Positive reflects the pending divestiture of the utility's generation assets, as mandated by the New Hampshire Public Utilities Commission (NHPUC), and the associated reduction in business risk. PSNH has reached agreement in principle on a settlement term sheet with the New Hampshire Office of Energy and Planning, certain members of the NHPUC staff, the Office of the Consumer Advocate, and two state senators regarding the divestiture of PSNH's generation assets. The settlement includes the recovery of stranded costs via the issuance of rate reduction bonds, which also would provide cost recovery for environmental upgrades already made to the Merrimack Station power plant. Fitch expects proceeds from the asset sale and rate reduction bonds to be used to reduce debt and equity in a manner to preserve the existing capital structure.
Legislation in New Hampshire is expected to be enacted in the third quarter that would enable PSNH to issue rate reduction bonds following the sale of its generation assets, and the NHPUC is expected to approve the settlement agreement before year-end. The divestiture of PSNH's generation assets is expected to occur by the beginning of 2017, with the issuance of the rate reduction bonds shortly thereafter.
A one-notch upgrade to PSNH's IDR and instrument ratings would likely occur following enactment of the legislation, assured recovery of PSNH's stranded costs related to the asset divestiture, and approval of the settlement by the NHPUC.
WMECO Positive Outlook Revision:
The Outlook revision to Positive reflects an improved business profile and the upcoming end to WMECO's mandated 44-month rate freeze. The regulated transmission and distribution (T&D) utility has low-risk operations and supportive regulatory mechanisms, including revenue decoupling, that provide stability to earnings and cash flows. WMECO's transmission investments in recent years have resulted in approximately 57% of the utility's rate base derived from FERC-regulated transmission assets, a percentage that is expected to continue to grow over the next two years. In addition, the Massachusetts rate freeze implemented in April 2012 at the time of parent ES' acquisition of NSTAR is set to expire at year-end, enabling WMECO to file a rate case as early as 2016.
A one-notch upgrade to WMECO's IDR and instrument ratings would likely occur following a constructive outcome in WMECO's next rate case and continued improvement in its business profile related to further FERC-regulated transmission investments through 2016.
KEY RATING DRIVERS
Conservative Business Model: ES' six regulated electric and natural gas distribution utilities deliver a relatively predictable earnings and cash flow stream. The three state service territories provide some regulatory diversity that is further enhanced by significant investment in FERC transmission projects. FERC is the largest of ES' regulatory jurisdictions, accounting for approximately 35% of rate base, compared to 28% in Connecticut, 25% in Massachusetts, and 12% in New Hampshire. Each electric utility has a significant amount of rate base attributed to FERC-regulated assets: WMECO (57%), CL&P (44%), NSTAR Electric (34%), PSNH (24%).
Growing FERC Investments: Planned transmission investments are expected to grow the FERC rate base to 41% by 2018. Fitch considers FERC regulation to be among the most constructive in the utilities sector, reflecting higher allowed returns (10.57% base return on equity [ROE], with the possibility of adders as incentives for certain critical projects) and timely recovery of invested capital. Northern Pass Transmission (NPT), ES' largest planned transmission project, is currently undergoing the necessary federal and state public permitting processes. NPT is expected to cost \\$1.4 billion in total and start providing New England utilities with access to cheaper hydroelectric generation by the first half of 2019.
Low-Risk Growth Strategy: ES is pursuing a relatively low-risk growth strategy. Planned capex over 2015-2018 is \\$8.4 billion, including \\$3.9 billion in FERC-regulated transmission. On average, 55%-60% of planned expenditures are recovered with limited lag, reflecting FERC construction work in progress (CWIP) and distribution trackers. The remainder of capex is distribution infrastructure, including expansion of the natural gas delivery business in Connecticut, as per legislation, which also receives timely recovery.
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 O&M, modest sales growth, and the expiration of merger-related costs and rate freezes.
Cost-Saving Opportunities: The acquisition of NSTAR, completed in April 2012, provides on-going cost-saving opportunities. Prior to the acquisition, each of the former Northeast Utilities subsidiaries operated independently with separate service centers, call centers, compensation packages, and benefit programs. Management expects to lower O&M on average by approximately 3% annually through 2018. Lower pension expense 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 ES' six core utility subsidiaries operate with limited commodity exposure. Only PSNH owns any meaningful amount of electric generation and all of its generation costs are recovered through an annual adjustment mechanism. Following PSNH's sale of its generation assets, ES' four electric utilities would all be lower-risk transmission and distribution (T&D) businesses. NSTAR Gas' cost of gas adjustment clause and Yankee Gas Services Company's (not rated by Fitch) purchased gas adjustment clause enable the utilities to recover the costs of procurement of natural gas on a semi-annual and annual basis, respectively.
Rate Freezes: The three Massachusetts utilities are subject to base rate freezes through 2015, while PSNH is operating under a 2010 settlement agreement that extends through June 30, 2015. During the rate freeze period, the utilities are able to retain any cost savings and will continue to adjust FERC transmission rates and distribution rates for a number of tracking mechanisms.
CL&P Rate Increase: CL&P's base rate freeze expired Dec. 1, 2014, and, on Dec. 17, 2014 the company was authorized a \\$134.1 million electric distribution rate increase based on a 9.17% ROE and 50.38% equity ratio. A one-year 15-basis point penalty related to CL&P's poor storm restoration performance reduced the revenue increase by about \\$4.5 million in the first year the new rates are in effect. The rate order also included the adoption of a revenue decoupling mechanism and the continuation of CL&P's earnings sharing mechanism (ESM). The ESM requires earnings in excess of the company's allowed ROE to be shared evenly with rate payers.
Revenue Decoupling: Legislation enacted in Massachusetts requires revenue decoupling to be implemented for each electric utility in the state. WMECO already has revenue decoupling in effect, and NSTAR Electric is expected to request revenue decoupling in its next rate case, per state mandate.
CL&P
Rating Drivers:
--Low-risk business profile with cash flows derived from regulated electric transmission and distribution operations.
--Improving financial profile.
--Significant cost saving opportunities.
--Sizeable capital investment plan focused on FERC-regulated transmission projects.
Low-Risk Business Profile: CL&P's ratings reflect the low-risk profile and stable cash flows of its regulated electric transmission and distribution operations. CL&P has no commodity exposure and recently implemented a decoupling mechanism that eliminates the impact of weather and usage patterns on electric revenue. An increasing share of earnings and cash flows is expected from FERC transmission investments that provide timely recovery of invested capital.
Improving Financial Profile: Credit quality measures improved in each of the past two years and are expected to continue the uptrend over the next few years. The expected improvement reflects higher distribution rates effective December 2014 following the expiration of a two-year rate freeze, growth from FERC-regulated transmission assets, and O&M reductions from cost-saving efficiencies. Fitch expects adjusted debt/EBITDAR to continue to improve over 2015 and 2016 from the 2014 figure of 3.77x, with FFO fixed-charge coverage expected to be around 5.0x and FFO adjusted leverage around 4.0x.
Sizable Capex: Capex is expected to remain elevated due in large part to significant investments in FERC-regulated regional transmission projects that received timely cost recovery and above-average returns. Forecast transmission capex is \\$871 million over the next four years, an increase of approximately 11% over the prior four-year period. A moderate rise in distribution expenditures is also likely. Fitch anticipates the capex will be funded in a manner to preserve the roughly 50% equity ratio employed in the December 2014 rate decision.
NSTAR Electric
Rating Drivers:
--Strong financial metrics.
--Resiliency despite rate freeze.
--Sizeable capital investment plan focused on FERC-regulated transmission projects.
Strong Financial Metrics: NSTAR Electric's financial profile is very strong within its current rating level, and Fitch expects it to remain so due to robust cash flows from ongoing FERC-regulated transmission projects. Fitch expects adjusted debt/EBITDAR to average around 3.0x through 2018, with FFO fixed-charge coverage to remain above 6.0x and FFO
adjusted leverage averaging around 3.7x.
Resiliency Despite Rate Freeze: NSTAR Electric has been operating under a rate freeze that went into effect in April 2012 and extends through the end of this year. Existing tracking mechanisms, along with cost controls, have enabled NSTAR Electric to maintain a strong credit profile despite the rate freeze. Costs recoverable outside of base rates include pension and post-retirement benefits, energy efficiency program costs and the associated lost revenue, storm costs, and a net metering surcharge.
Sizeable Capex: Capex are expected to remain elevated over the next four years due to significant investments in FERC-regulated transmission projects. Forecasted transmission capex is more than \\$1 billion through 2018. Fitch expects NSTAR Electric to fund the capex in a manner that preserves its existing capital structure.
NSTAR Gas
Rating Drivers:
--Solid, but weakening, credit metrics.
--Rate filing.
--Revenue stability.
Solid, But Weakening, Credit Metrics: NSTAR Gas' credit metrics weakened over the past year, due in large measure to a rate freeze implemented in April 2012 that extends through 2015 and the expiration of bonus depreciation. Improvement is not likely before new rates are implemented in 2016. In 2015, Fitch expects adjusted debt/EBITDAR to weaken to 4.0x and FFO fixed-charge coverage to 5.0x and then improve in 2016 when higher rates are anticipated.
Rate Filing: NSTAR Gas filed with the Massachusetts Department of Public Utilities (MDPU) for a \\$33.9 million (23%) base rate increase in December 2014 to be effective upon expiration of the rate freeze on Jan. 1, 2016. The base rate increase is premised on a 10.25% ROE and a 2013 test period adjusted for known and measureable changes. NSTAR Gas is also seeking an additional \\$12 million to be collected through non-base rate recovery mechanisms. Fitch expects higher rates to reverse the recent downtrend in credit metrics.
Revenue Stability: NSTAR Gas is a pure distribution company with limited commodity price risk. The company recovers supply costs through a seasonal cost of gas adjustment clause (CGAC) that is reset semi-annually. A local distribution adjustment clause (LDAC) that provides recovery of energy efficiency program costs, environmental costs, and pension and post-retirement benefit costs also enhances revenue stability. The LDAC is reset annually and not affected by the rate freeze. The pending rate case includes a request for a decoupling mechanism.
PSNH
Rating Drivers:
--Pending sale of generation assets and approval of stranded cost recovery.
--Solid and improving credit metrics.
Sale of Generation Assets: The pending divestiture of the utility's generation assets, as mandated by the New Hampshire Public Utilities Commission (NHPUC), would reduce business risk. PSNH has reached agreement in principle on a settlement term sheet with several parties, including certain members of the NHPUC staff and two state senators regarding the divestiture of PSNH's generation assets. The settlement includes the recovery of stranded costs via the issuance of rate reduction bonds, which also would provide cost recovery for environmental upgrades already made to the Merrimack Station power plant. Fitch expects proceeds from the asset sale and rate reduction bonds to be used to reduce debt and equity in a manner to preserve the existing capital structure.
Legislation in New Hampshire is expected to be enacted in the third quarter that would enable PSNH to issue rate reduction bonds following the sale of its generation assets, and the NHPUC is expected to approve the settlement agreement before year-end. The divestiture of PSNH's generation assets is expected to occur by the beginning of 2017, with the issuance of the rate reduction bonds shortly thereafter.
A one-notch upgrade to PSNH's IDR and instrument ratings would likely occur following enactment of the legislation, assured recovery of PSNH's stranded costs related to the asset divestiture, and approval of the settlement by the NHPUC.
Solid and Improving Credit Metrics: PSNH's credit metrics are expected to remain supportive of credit quality, driven by O&M reductions and operating efficiencies. EBITDAR interest coverage and FFO fixed-charge coverage were 6.25x and 5.6x, respectively, in 2014, and are expected to strengthen over 2015-2016. Adjusted debt/EBITDAR is expected to approach 3.5x in 2015 and 3.3x in 2016, from 3.9x in 2014.
WMECO
Rating Drivers:
--Improved business profile and revenue stability.
--Solid financial metrics.
Improved Business Profile and Revenue Stability: WMECO's low-risk, T&D operations and supportive regulatory mechanisms provide stability to earnings and cash flows. Transmission investments in recent years have resulted in approximately 57% of the utility's rate base coming under FERC regulatory purview, and this figure is expected to continue to grow through 2016. Fitch considers the FERC regulatory jurisdiction to be among the most constructive, with relatively good ROEs and timely recovery of invested capital. In addition, the Massachusetts rate freeze implemented in April 2012 is set to expire at year-end, enabling WMECO to file a rate case as early as 2016.
A one-notch upgrade to WMECO's IDR and instrument ratings would likely occur following a constructive outcome in WMECO's next rate case and continued improvement in its business profile related to further FERC-regulated transmission investments through 2016.
Solid Financial Metrics: WMECO's financial profile has benefited from the company's transmission investments and O&M reductions, despite operating under a rate freeze. EBITDAR interest coverage and FFO fixed-charge coverage are both strong, at 5.7x and 6.4x, respectively, in 2014. Coverage metrics are expected to remain strong during the forecast period, while adjusted debt/EBITDAR is expected to improve, averaging around 3.8x through 2018.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for ES include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018.
--Annual gas sales growth averaging 3.0% through 2018.
--Annual O&M reductions averaging 3% per year through 2018.
--PSNH's generation asset divestiture assumed January 1, 2017.
--FERC base ROE of 10.57%.
--Access Northeast gas pipeline project not included in the forecast.
Fitch's key assumptions within the rating case for CL&P include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018.
--O&M expense to remain flat in 2015, then decrease by an average of 3.5% per year through 2018.
--Total capex of approximately \\$2.3 billion in 2015-2018.
Fitch's key assumptions within the rating case for NSTAR Electric include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018.
--O&M expense to remain relatively flat through 2018.
--Total capex of approximately \\$2 billion in 2015-2018.
Fitch's key assumptions within the rating case for NSTAR Gas include:
--Annual gas sales growth averaging 3.0% through 2018.
--O&M to remain flat over 2015-2018.
--Total capex of approximately \\$400 million-\\$450 million in 2015-2018.
Fitch's key assumptions within the rating case for PSNH include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018.
--Total capex of approximately \\$800 million in 2015-2018.
--PSNH's generation asset divestiture assumed Jan. 1, 2017.
Fitch's key assumptions within the rating case for WMECO include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018.
--O&M expense to decrease by an average of 3%-4% per year through 2018.
--Total capex of approximately \\$400 million-\\$450 million in 2015-2018.
RATING SENSITIVITIES
ES:
Positive: Given the large debt balance at the parent and expectations for adjusted debt/EBITDAR to be around 4.2x, a positive rating action is not expected, but could occur if adjusted debt/EBITDAR were to decrease below 3.5x.
Negative: Adverse regulatory outcomes pose the greatest risk to ratings. Fitch could downgrade ratings if adjusted debt/EBITDAR were to increase above 4.5x on a sustained basis.
CL&P:
Positive: Achieving targeted cost reductions and decreasing adjusted debt/EBITDAR below 3.5x on a sustainable basis could lead to a ratings upgrade.
Negative: A ratings downgrade is not likely, given the Positive Outlook, but could occur if adjusted debt/EBITDAR were to exceed 4.0x on a sustained basis.
NSTAR Electric:
Positive: A positive rating action is not likely during the high capex cycle. Ratings upside is also restricted by the two-notch difference from the IDR of parent ES.
Negative: Given NSTAR Electric's strong position within its current rating category, a negative rating action is not expected. However, ratings could be downgraded if adjusted debt/EBITDAR were to increase above 3.5x and FFO fixed-charge coverage dropped below 4.8x on a sustained basis.
NSTAR Gas:
Positive: A positive rating action is not likely due to the company's small size, which results in a significant impact on credit ratios resulting from minor changes in cash flows and earnings.
Negative: A negative rating action could occur if adjusted debt/EBITDAR were to exceed 4.2x and FFO fixed-charge coverage dropped below 4.5x on a sustained basis.
PSNH:
Positive: A one-notch upgrade to PSNH's IDR and instrument ratings would likely occur following enactment of the pending New Hampshire state legislation that would enable PSNH to recover its stranded costs related to the divestiture of its generation assets and approval of the settlement by the NHPUC.
Negative: A negative rating action is not likely, given the Positive Outlook, but could occur if adjusted debt/EBITDAR were to exceed 4.0x on a sustained basis.
WMECO:
Positive: A one-notch upgrade to WMECO's IDR and instrument ratings would likely occur following a constructive outcome in WMECO's next rate case and continued improvement in its business profile related to further FERC-regulated transmission investments through 2016.
Negative: A negative rating action is not likely, given the Positive Outlook, but could occur if adjusted debt/EBITDAR were to exceed 4.0x on a sustained basis.
LIQUIDITY
Liquidity is considered adequate for ES and each of its subsidiaries.
ES, CL&P, PSNH, WMECO, NSTAR Gas, and Yankee Gas participate in a joint \\$1.45 billion revolving credit facility that expires Sept. 6, 2019. The credit facility primarily supports ES' \\$1.45 billion commercial paper (CP) program, which ES used to provide its subsidiaries with intercompany loans. CL&P has a \\$600 million borrowing sublimit, with PSNH and WMECO at \\$300 million each. As of March 31, 2015, ES had \\$788 million in short-term borrowings outstanding under its CP program, leaving \\$662 million of available borrowing capacity. CL&P, PSNH, and WMECO had \\$190.1 million, \\$82 million, and \\$71 million, respectively, in outstanding intercompany loans from ES as of March 31, 2015.
NSTAR Electric maintains a separate revolving credit facility that expires Sept. 6, 2019. The credit facility serves to backstop an equal-sized CP program. As of March 31, 2015, NSTAR Electric had \\$215.5 million in short-term borrowings, leaving \\$234.5 million of available capacity.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings with a Positive Rating Outlook:
The Connecticut Light and Power Company
--Long-term IDR at 'BBB+';
--Senior Secured debt at 'A';
--Senior Unsecured debt and revenue bonds at 'A-';
--Preferred Stock at 'BBB'.
Public Service Company of New Hampshire
--Long-term IDR at 'BBB+';
--Senior Secured debt at 'A'.
Western Massachusetts Electric Company
--Long-term IDR at 'BBB+';
--Senior Unsecured debt and revenue bonds at 'A-'.
Fitch affirms the following ratings with a Stable Rating Outlook:
Eversource Energy
--Long-term IDR at 'BBB+';
--Senior Unsecured debt at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
NSTAR Electric Company
--Long-term IDR at 'A';
--Senior Unsecured debt at 'A+';
--Preferred Stock at 'A-';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
NSTAR Gas Company
--Long-term IDR at 'A-';
--Senior Secured debt at 'A+'.
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