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
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000611
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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