Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Northeast Utilities (NU) to 'BBB+' from 'BBB' and downgraded the IDR of NSTAR to 'BBB+' from 'A-'. Fitch's rating actions follow the merger of NSTAR into NU. NSTAR LLC (successor to NSTAR; name change will be effective on closing) will be a second-tier holding company subsidiary of NU. Fitch has also taken various rating actions for the regulated subsidiaries of NU.
Additionally, Fitch has removed NU's ratings from Rating Watch Positive and NSTAR's from Rating Watch Negative. The Rating Outlook is now Stable all entities. This includes Connecticut Light & Power Co. (CL&P), NSTAR Electric, NSTAR Gas, Public Service Co. of New Hampshire (PSNH), and Western Massachusetts Electric Co. (WMECO). A full list of rating actions can be found at the end of this release.
PARENT COMPANY RATIONALE
The NU upgrade is driven by the greater
financial flexibility and improved capability to fund the substantial
capital investment particularly for electric transmission projects
planned over the next three years. Fitch expects management to
effectively utilize synergies achieved through the merger, as well as
effective cost management over the respective distribution base rate
freeze periods to stabilize credit metrics. Fitch forecasts key
performance metrics of EBITDA-to-interest and funds from operations
(FFO)-to-debt above 5.0 times (x) and 17.0%, respectively through 2014,
which approximate 'BBB+' financial guideline measures.
Key Rating Drivers
--Low-risk business profile with virtually all
cash flows derived from regulated transmission and electric and gas
distribution;
--Diversity of cash flows with six regulated utility
subsidiaries in three state jurisdictions;
--Relatively low parent
level debt;
--Sizable consolidated capital investment plan focused
primarily on transmission;
--Ability to manage costs throughout the
rate freeze periods and achieving expected cost synergies;
--Uncertain
ultimate cost recovery from tropical storm Irene and October 2011
snowstorm.
Fitch has equalized the ratings of NU and NSTAR LLC (successor to NSTAR), which is a second-tier holding company subsidiary of NU. In addition, Fitch assigns an 'F2' rating to NSTAR LLC's new $175 million commercial paper (CP) program.
Fitch's 'Parent Subsidiary Rating Linkage Criteria' is an important component to the various rating actions taken for NU's regulated subsidiaries which are summarized below.
CL&P RATING RATIONALE
Fitch has upgraded the IDR of CL&P to
'BBB+' from 'BBB' reflecting the beneficial support of a stronger NU,
particularly as the utility addresses the issues of storm recovery and
faces sizable capital investments in its transmission projects. However,
Fitch expects weakening credit metrics in the near term.
Fitch expects EBITDA-to-interest to remain above 4.5x, and FFO-to-debt to range between 14%-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 rate freeze through 2014.
As part of the settlement with Connecticut, CL&P 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. The ultimate amount of recovery remains uncertain.
PSNH RATING RATIONALE
Fitch has upgraded the IDR of PSNH to 'BBB+'
from 'BBB'. The ratings reflect PSNH's standalone credit profile.
Financial metrics continue to strengthen, and 2012 will reflect higher
revenues due to the Merrimack scrubber coming on line in November 2011.
Fitch expects financial metrics of EBITDA-to-interest and FFO-to-debt to
remain above 6.0x and 20%, respectively through 2014, which is robust
relative to Fitch guidelines for the rating category. This, coupled with
the improved funding capabilities of a stronger parent, and the
realization of merger-related synergies, support the rating upgrade.
Fitch considers effective management of utility O&M costs, as well as
the realization of merger-related synergies as key to maintaining credit
quality.
WMECO RATING RATIONALE
Fitch has upgraded the IDR of WMECO to
'BBB+' from 'BBB'. Financial metrics improved substantially following a
2011 rate case settlement and Fitch expects further improvement as
transmission projects come on-line in 2013. Fitch expects
EBITDA-to-interest to remain above 5.0x and FFO-to-debt to range between
14%-18% through 2014. WMECO's ratings also benefit from the support and
improved funding capabilities of a stronger NU.
WMECO's ratings are also supported by a regulatory decoupling mechanism which lowers revenue and cash flow volatility. Fitch views effective cost management and the realization of merger-related synergies as key to maintaining credit quality over the 44-month rate freeze. Following completion of transmission projects in 2013, WMECO will derive approximately 60% to 70% of EBITDA from transmission.
NSTAR ELECTRIC RATING RATIONALE
Fitch has downgraded the IDR of
NSTAR Electric to 'A' from 'A+' principally reflecting the rating
linkage to its new parent, NU. Fitch expects credit metrics to remain
strong with EBITDA-to-interest to remain comfortably above 7.0x and
FFO-to-debt to be up to 24% through 2014. Fitch projected credit
measures include a 44-month base distribution rate freeze, cost
deferrals and absence of bonus depreciation.
The ability to realize cost savings and control other costs will be critical to maintaining credit quality. The ratings also benefit from the continuation of existing rate-making mechanisms, including pension trackers and timely recovery of fuel supply and energy efficiency costs.
NSTAR GAS
Fitch has affirmed the IDR of NSTAR Gas at 'A-'. The ratings reflect NSTAR Gas' standalone credit profile. Fitch expects EBITDA-to-interest to remain near 6.0x; and FFO-to-debt to range near 20% through 2014. Forecasts incorporate a $3 million one-time customer credit in 2012 as part of the Massachusetts settlement agreement. Achievement of cost controls and cost synergies over the 44-month rate freeze period will be key to maintaining credit metrics. Fitch has upgraded the senior secured rating of NSTAR Gas reflecting Fitch's standard capital structure notching.
Fitch has upgraded and removed the following ratings from Rating Watch Positive:
Northeast Utilities
--IDR to 'BBB+' from 'BBB';
--Senior
unsecured debt to 'BBB+' from 'BBB';
The Rating Outlook is Stable.
Fitch has also upgraded the following ratings:
Connecticut Light & Power Co. (CL&P)
--IDR to 'BBB+' from
'BBB';
--Senior unsecured debt to 'A-' from 'BBB+';
--Senior
secured debt to 'A' from 'A-';
--Preferred Stock to 'BBB' from
'BBB-'.
Connecticut Development Authority (CT) (CL&P Projects)
--Senior
unsecured industrial revenue & pollution control bonds to 'A-' from
'BBB+';
--Senior secured industrial revenue & pollution control
bonds to 'A' from 'A-'.
New Hampshire Business Finance Authority (NH) (for CL&P)
--Senior
unsecured industrial revenue & pollution control bonds to 'A-' from
'BBB+'.
The Rating Outlook is Stable.
Public Service Company of New Hampshire (PSNH)
--IDR to 'BBB+' from
'BBB';
--Senior secured debt to 'A' from 'A-'.
New Hampshire Business Finance Authority (NH) (for PSNH)
--Senior
secured industrial revenue & pollution control bonds to 'A' from 'A-'.
The
Rating Outlook remains Stable.
Fitch took the following actions on NSTAR Gas:
--IDR affirmed at
'A-';
--Senior secured debt upgraded to 'A+' from 'A'.
The
Rating Outlook remains Stable.
Western Massachusetts Electric Company (WMECO)
--IDR to 'BBB+' from
'BBB'
--Senior unsecured debt to 'A-' from 'BBB+'.
Connecticut Development Authority (CT) (for WMECO)
--Senior
unsecured industrial revenue & pollution control bonds to 'A-' from
'BBB+'.
The Rating Outlook remains Stable.
Fitch has downgraded the following ratings:
NSTAR LLC (formerly NSTAR)
--IDR to 'BBB+' from 'A-';
--Senior
unsecured debt to 'BBB+' from 'A';
--Short-term IDR and commercial
paper to 'F2' from 'F1'.
The Rating Outlook is Stable.
Fitch also took the following actions on NSTAR Electric
--IDR
upgraded to 'A' from 'A+';
--Senior unsecured debt upgraded to 'A+'
from 'AA-';
--Preferred Stock upgraded to 'A-' from 'A';
--Short-term
IDR and CP affirmed at 'F1'.
The Rating Outlook is Stable.
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. 12, 2011;
--Notching and Recovery Ratings for the
Utilities Sector, Aug. 12, 2011;
--Parent and Subsidiary Rating
Linkage, Aug. 12, 2011.
Applicable Criteria and Related Research:
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
Corporate
Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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Contacts:
Fitch Ratings
Primary Analyst:
Lindsay Minneman,
+1-212-908-0592
Associate Director
Fitch, Inc., One State
Street Plaza, New York, NY 10004
or
Secondary Analyst:
Rob
Hornick, +1-212-908-0523
Senior Director
or
Committee
Chairperson:
Ralph Pellecchia, +1-212-908-0586
Senior Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com
