Fitch Ratings has assigned a rating of 'BBB' to Northeast Utilities' (NU) $300 million issuance of floating rate senior notes, series D, due Sept. 20, 2013. Proceeds from the sale will be used to repay at maturity $263 million of senior notes, series A, due 2012; and to refinance short-term debt outstanding. The new notes rank equally in right of payment with existing senior unsecured notes of NU. The rating is on Rating Watch Positive pending outcome of the plan for merger with NSTAR (rated with an IDR of 'A-'; Rating Watch Negative by Fitch).
Rating Watch Positive
The Rating Watch Positive is driven by the improved capability of the merged entity to fund the substantial capital investments in electric transmission projects and the strong financial profile of NSTAR. The combined entity would have greater financial flexibility and would benefit from stronger internal generation of funding and equity capital than NU alone. NU plans to spend $5.8 billion through 2016 in capital investments.
Fitch views as not material to NU credit quality a recent merger development whereby on March 13, 2012, NU and NSTAR entered into a comprehensive merger settlement agreement with the State of Connecticut Attorney General and the Connecticut Office of Consumer Counsel. The agreement established rate conditions whereby operating subsidiary Connecticut Light & Power (CL&P; IDR 'BBB'; Positive Outlook) is required to provide an immediate $25 million rate credit to customers and will be subject to a distribution rate freeze through Nov. 30, 2014. Fitch would look to NU to effectively utilize synergies achieved through the merger, as well as effective cost management over the rate-freeze period to mitigate credit deterioration.
The settlement agreement also provides that storm cost recovery for CL&P will be deferred to be recoverable in rates over a six-year period starting Dec. 1, 2014. Additionally, the utility agreed to write-down its deferred asset by $40 million to a net $223 million, although the amount of storm costs which CL&P will ultimately recover is uncertain. In the interim period there will be an adjudicatory proceeding to determine this amount. Fitch anticipates the utility will carry higher levels of debt related to storm costs, and cost deferrals will pressure utility financial metrics through 2014.
Fitch expects to resolve the Rating Watch Positive pending final outcome of the plan for merger. An outcome is anticipated in April 2012 and the rating could be upgraded by one notch.
Stable Financial Metrics
NU's cash flow metrics remain consistent with Fitch's guidelines for 'BBB' rated utility parent companies, with the ratios at Dec. 31, 2011 of EBITDA-to-interest at 4.7 times (x); funds from operations (FFO) interest coverage at 4.2x; and FFO-to-debt at 15.3%. Pro-forma for the NSTAR merger, Fitch expects a moderate improvement in financial metrics and continues to view managing costs as a key determinant to maintaining a stable credit profile. Fitch expects to complete its analysis over the next two weeks and resolve the Watch around time of the merger closing.
Solid Liquidity Profile
The consolidated liquidity position at NU remains sufficient relative to current funding needs with approximately $565.1 million in consolidated borrowing capacity available at Dec. 31, 2011. NU has a stand-alone bank credit facility with total borrowing capacity of $500 million, which expires in 2013, and the operating subsidiaries have a joint bank credit facility with total borrowing capacity of $400 million, which also expires in 2013.
Moderate Funding Needs
NU consolidated maturities are manageable with $66 million due in 2012 (excluding the $263 million senior notes, series A being refinanced); $730 million due in 2013 (including $300 million senior notes, series D); $275 million due in 2014; $150 million due in 2015; and $15.4 million due in 2016. Fitch anticipates NU and its operating subsidiaries will have the access to the bank and capital markets required to manage near-term funding needs.
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. 16, 2011);
--'Rating North American Utilities, Gas and Water Companies'(May 16, 2011);
--'Recovery Ratings and Notching Criteria for Utilities' (May 12, 2011);
--'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=648449
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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