NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Eversource Energy's (Eversource) $500 million debt issuance, consisting of two tranches of unsecured notes. The $250 million, 2.50% senior notes, series I, mature March 15, 2021, and the $250 million, 3.35% senior notes, series J, mature March, 15. 2026. The notes will rank pari passu with Eversource's existing and future unsecured and unsubordinated debt.
The Rating Outlook is Stable.
Net proceeds will be used to repay a portion of Eversource's outstanding short-term debt, of which there was $986 million of commercial paper (CP) borrowings as of March 3, 2016.
KEY RATING DRIVERS
Conservative Business Model
Eversource's 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 transmission projects regulated by The Federal Energy Regulatory Commission (FERC). The FERC is the largest of Eversource's regulatory jurisdictions, accounting for approximately 35% of rate base, compared to 29% in Connecticut, 25% in Massachusetts, and 11% in New Hampshire.
Growing FERC Investments
Planned transmission investments are expected to grow the FERC rate base to 42% by 2019. 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), Eversource's largest planned transmission project, is currently undergoing the necessary federal and state public permitting processes. NPT is expected to cost $1.6 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
Eversource is pursuing a relatively low-risk growth strategy. Planned capex over 2016-2019 is $9.2 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 operating and maintenance expense (O&M), modest sales growth, and the recent expiration of rate freezes.
Cost-Saving Opportunities
The acquisition of NSTAR, completed in April 2012, has provided 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 2%-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 Eversource's six core utility subsidiaries operates with limited commodity exposure. Only Public Service Company of New Hampshire (PSNH, 'BBB+'/Positive Outlook) 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, Eversource's four electric utilities would all be lower-risk transmission and distribution (T&D) businesses. NSTAR Gas Company's (NSTAR Gas, 'A-'/Stable Outlook) cost of gas adjustment clause and Yankee Gas Services Company's (Yankee Gas; not rated by Fitch) purchased gas adjustment clause enable the utilities to recover natural gas procurement costs on a semi-annual and annual basis, respectively.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Eversource include:
--Annual electric sales growth averaging 0.0%-0.5% through 2018;
--Annual gas sales growth averaging 3% through 2018;
--Annual O&M reductions averaging 2%-3% per year through 2018;
--PSNH's generation asset divestiture assumed Jan. 1, 2017;
--FERC base ROE of 10.57%;
--Access Northeast gas pipeline project not included in the forecast.
RATING SENSITIVITIES
Positive Rating Action: Given the large debt balance at the parent and expectations for adjusted debt-to-EBITDAR to be around 4.2x, a positive rating action is not expected, but could occur if adjusted debt-to-EBITDAR were to decrease below 3.5x.
Negative Rating Action: Adverse regulatory outcomes pose the greatest risk to ratings. Fitch could downgrade ratings if adjusted debt-to-EBITDAR were to increase above 4.5x on a sustained basis.
LIQUIDITY
Liquidity is considered adequate for Eversource and each of its subsidiaries.
Eversource, The Connecticut Light and Power Company (CL&P, 'BBB+'/Positive Outlook), PSNH, Western Massachusetts Electric Company (WMECO, 'BBB+'/Positive Outlook), NSTAR Gas, and Yankee Gas participate in a joint $1.45 billion revolving credit facility (RCF) that terminates Sept. 4, 2020. The credit facility primarily supports Eversource's $1.45 billion CP program, which Eversource uses 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 3, 2016, Eversource had $986 million in short-term borrowings outstanding under its CP program, leaving $464 million of available borrowing capacity. CL&P, PSNH, and WMECO had $277.4 million, $231.3 million, and $143.4 million, respectively, in outstanding intercompany loans from Eversource as of Dec. 31, 2015.
NSTAR Electric Company (NSTAR Electric, 'A'/Stable Outlook) maintains a separate $450 million RCF that terminates Sept. 4, 2020. The credit facility serves to backstop an equal-sized CP program. As of Dec. 31, 2015, NSTAR Electric had $62.5 million in CP borrowings, leaving $387.5 million of available capacity.
Eversource had $24 million on unrestricted cash on its balance sheet at Dec. 31, 2015.
Date of Relevant Rating Committee: Sept. 29, 2015
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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