July 6, 2016 - 5:08 PM EDT
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Fitch Upgrades CL&P, PSNH, and WMECO; Eversource Outlook to Positive

Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of electric utility companies The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric Company (WMECO) to 'A-' from 'BBB+'. Fitch has also affirmed the Long-Term IDRs of parent company Eversource Energy (Eversource; 'BBB+') and its other rated utility subsidiaries: NSTAR Electric Company (NSTAR Electric; 'A') and NSTAR Gas Company (NSTAR Gas; 'A-'). A detailed list of rating actions is shown at the end of this release.

In addition, Fitch has revised the Rating Outlook on Eversource to Positive from Stable.

The Rating Outlook on CL&P, PSNH, WMECO, NSTAR Electric, and NSTAR Gas is Stable.

KEY RATING DRIVERS

CL&P

Ratings Upgrade: CL&P's ratings upgrade reflects Fitch's expectation for continued financial strength due to investments in transmission projects and ongoing operational efficiencies and reductions in operating and maintenance expense (O&M). In addition, CL&P's business risk profile has improved as a result of the utility's growing transmission business, with a large amount of the utility's rate base regulated by the Federal Energy Regulatory Commission (FERC). CL&P's FERC-regulated transmission assets are expected to provide an increasing share of earnings and cash flow over the next four years.

Low-Risk Business Profile: CL&P's regulated electric transmission and distribution (T&D) operations have a low-risk business profile. The utility has no commodity exposure, and full revenue decoupling eliminates the impact of weather and usage patterns, providing greater predictability to earnings and cash flows. CL&P's FERC-regulated transmission assets provide beneficial exposure to one of the more constructive regulatory jurisdictions, helping to counterbalance Connecticut's more challenging regulatory environment.

Solid Financial Profile: Financial metrics are expected to continue to improve, aided by cost-saving efficiencies and reductions to O&M. Growth from FERC-regulated transmission assets contributes to the expected improvement by providing strong and stable cash flows. Fitch expects adjusted debt/EBITDAR to average around 3.2x-3.5x through 2019, funds flow from operations (FFO) fixed-charge coverage to average around 5.0x-5.5x, and FFO adjusted leverage to average around 3.6x-3.9x.

Somewhat Challenging Regulatory Environment: Fitch considers the regulatory environment overseen by the Connecticut Public Utilities Regulatory Authority (PURA) to be somewhat challenging. In CL&P's 2014 rate case, the PURA authorized a below-average return on equity (ROE) of 9.17%, which PURA then reduced by 15 basis points (bps) for the 12-month period ended Nov. 30, 2015 as a penalty for prior poor storm restoration performance. In addition, an earnings sharing mechanism requires CL&P to share with customers excess earnings obtained from the utility's cost saving initiatives.

Sizable Capex: Capex is expected to remain elevated through 2017, due in large part to significant investments in FERC-regulated regional transmission projects. Management forecasts transmission capex to total $973 million over 2016-2019, with peak-year transmission spending of $351 million in 2016. Improvements to CL&P's distribution system will also contribute to the elevated capex in the near term. Fitch anticipates capex will be funded in a manner consistent with the current capital structure.

PSNH

Ratings Upgrade: PSNH's ratings upgrade largely reflects the planned divestiture of the utility's generation assets and the associated reduction in the utility's business risk. The New Hampshire Public Utilities Commission (NHPUC) approved last Friday the settlement agreement between PSNH and various intervenors regarding the divestiture of PSNH's generation assets. PSNH now has approval to issue rate reduction bonds following the sale of its generation assets, which is expected in the first half of 2017. 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.

Solid and Improving Credit Metrics: PSNH's ratings upgrade also reflects improving financial metrics at the utility. Growth in FERC-regulated transmission projects is expected to strengthen cash flows, with O&M reductions and other cost cutting initiatives improving EBITDA margins. Fitch expects adjusted debt/EBITDAR to average around 3.0x-3.5x through 2019, FFO fixed-charge coverage to average around 6.0x-6.5x, and FFO adjusted leverage to average around 3.4x-3.7x.

Expected Low-Risk Business Profile: PSNH's business risk profile will improve following the divestiture of the utility's generation assets. PSNH will become a pure T&D electric utility without the additional operational risks associated with owning generation assets, particularly coal-fired generation assets exposed to stricter environmental regulations. PSNH currently recovers all of its generation and power supply costs through an annual adjustment mechanism. A material portion of rate base is derived from transmission assets that benefit from constructive FERC regulation.

Declining Capex: PSNH's capex peaked in 2015 at slightly more than $300 million that year, with a large portion of that spent on FERC-regulated transmission projects. Capex is expected to modestly decline this year and then decline more meaningfully in 2017, partly due to the planned divestiture of the utility's generation assets. Management forecasts transmission capex to total $271 million over 2016-2019, with peak-year transmission spending of $112 million in 2016. The decline in capex after 2016 should lessen PSNH's external funding needs and improve leverage metrics over the next few years.

WMECO

Ratings Upgrade: WMECO's ratings upgrade reflects an improved business profile and Fitch's expectation for stronger credit metrics. WMECO's low-risk T&D utility operations and supportive regulatory mechanisms, including revenue decoupling, provide stability to earnings and cash flows. Transmission investments have resulted in a majority of the utility's rate base being regulated by FERC. Fitch considers FERC to be among the most constructive regulatory jurisdictions, providing above-average ROEs and timely recovery of invested capital. Strong cash flows from transmission projects are expected to bolster WMECO's credit metrics.

Low-Risk Business Profile: WMECO's regulated electric T&D operations have a low-risk business profile. The utility has no commodity exposure, and full revenue decoupling eliminates the impact of weather and usage patterns. A majority of rate base is derived from FERC-regulated transmission assets, which provide the utility with beneficial regulatory diversification.

Improving Financial Profile: Financial metrics are likely to improve over the next couple years, reflecting cash flow growth from recent and soon-to-be-completed FERC-regulated transmission projects, improved internal cash flow generation due to a decline in future capex, and reductions to O&M associated with cost-saving efficiencies. Fitch expects adjusted debt/EBITDAR to average around 3.3x-3.7x through 2019, FFO fixed-charge coverage to average around 6.0x-6.5x, and FFO adjusted leverage to average around 3.5x-4.0x.

Declining Capex: Capex is likely to peak in 2016 as a result of an expected decline in future transmission spending. Management forecasts transmission capex to total $255 million over 2016-2019, with peak-year spending of $115 million projected for 2016. The decline in transmission capex after 2016 should lessen WMECO's external funding needs and could improve leverage metrics over the next few years.

Modest Scale of Operations: WMECO had approximately $160 million of EBITDA in 2015, making it one of the smaller electric T&D utilities in the sector. Consequently, small changes in revenue or expense items can have an outsized impact on credit metrics. However, the effect on financial flexibility is mitigated by stabilizing regulatory mechanisms and support from the utility's large and financially strong parent, Eversource.

Eversource

Positive Outlook: The revision of Eversource's Rating Outlook to Positive from Stable reflects a stronger overall business risk profile combined with the company's solid operational and financial performance, which has improved more than previously expected. Investment in FERC-regulated transmission projects and the planned sale of PSNH's generation assets will result in a family of low-risk regulated T&D utilities, reducing the company's consolidated business risk.

Management has been effective in integrating its utility subsidiaries under a central model, providing operational efficiencies. Cost cutting initiatives have been more fruitful than originally anticipated, with O&M reductions averaging 5.1% per year over the past three years, exceeding management's earlier 3%-4% target.

Given Eversource's improved business risk profile, a one-notch upgrade could occur if Fitch were to expect adjusted debt/EBITDAR to average around 4.0x and FFO adjusted leverage to average around 4.5x on a sustained basis. In addition, Fitch would look for construction to begin on the Northern Pass Transmission (NPT) project and for greater clarity regarding the impact the project would have on Eversource's financial metrics.

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 FERC. FERC-regulated transmission accounts for approximately 35% of rate base, with electric distribution accounting for 51%, natural gas distribution for 9% and electric generation for 5%. Planned transmission investments are expected to grow the FERC-regulated portion of rate base to 42% by 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 projects. NPT, Eversource's largest planned transmission project, is currently undergoing the necessary permitting processes. NPT is expected to cost $1.6 billion in total and be placed into service by the first half of 2019. Most of Eversource's planned capex will be recovered with limited lag, reflecting FERC construction work in progress and distribution trackers. The remainder of capex is distribution infrastructure, including expansion of the natural gas delivery business in Connecticut, which also receives timely recovery.

Strong Utility Credit Profiles

Eversource's five Fitch-rated utility subsidiaries have strong credit profiles, benefiting from solid operational and financial performance. Improving credit metrics at the company's electric utility subsidiaries largely reflect a combination of robust cash flows from FERC-regulated transmission investments and reductions to O&M related to operational efficiencies and cost cutting initiatives.

Parent-Subsidiary Rating Linkage: There is a moderate to strong linkage between the Long-Term IDRs of Eversource and each of its subsidiaries. The linkages originate primarily from strategic drivers. Each subsidiary is important to Eversource, and the parent financially supports its subsidiaries when needed via equity infusions and intercompany loans. Fitch considers a two-notch differential between the Long-Term IDRs of Eversource and each of its subsidiaries to be the maximum allowed differential.

NSTAR Electric

Low-Risk Business Profile: NSTAR Electric's ratings reflect the low-risk business profile and stable cash flows of the utility's regulated electric T&D operations. NSTAR Electric has no commodity exposure, and the utility fully recovers its energy supply costs. An increasing share of earnings and cash flow is expected from FERC-regulated transmission assets, which provide strong cash flows and get timely recovery of invested capital.

Strong Financial Metrics: NSTAR Electric's financial profile is very strong, benefiting from a conservative capital structure and robust cash flows. Near-term investments in FERC-regulated transmission projects should enable the utility to maintain its financial strength. Fitch expects adjusted debt/EBITDAR to average around 2.7x-3.0x through 2019, FFO fixed-charge coverage to average around 6.5x-7.0x, and FFO adjusted leverage to average around 3.2x-3.6x.

Sizable Capex: Capex is expected to remain elevated through 2018, due in large part to significant investments in FERC-regulated regional transmission projects. Management forecasts transmission capex to total $905 million over 2016-2019, with peak-year transmission spending of $302 million in 2016. Fitch expects NSTAR Electric to fund the capex in a manner that preserves its existing capital structure.

Supportive Cost Recovery Mechanisms: NSTAR Electric has various tracking mechanisms that enable it to recover costs outside of base rates. These tracking mechanisms cover pension and post-retirement benefit expenses, energy efficiency program costs and the associated lost revenue, and storm costs, and include a surcharge for net metering. Management's focus on cost-saving efficiencies also helps NSTAR Electric maintain a strong credit profile without the need for frequent base rate case filings.

NSTAR Gas

Low-Risk Business Profile: NSTAR Gas' ratings reflect the low-risk business profile of the utility's regulated natural gas distribution operations. NSTAR Gas has no commodity exposure, with fuel supply costs recovered through a seasonal cost of gas adjustment clause (CGAC) that is reset semiannually. Full revenue decoupling mechanism eliminates the impact of weather and usage patterns.

Balanced Regulatory Environment: NSTAR Gas operates in a relatively balanced regulatory environment overseen by the Massachusetts Department of Public Utilities (DPU). The utility's recent rate case resulted in a $15.8 million base rate increase effective Jan. 1, 2016. This was the utility's first rate case since 2005 and its first base rate increase since 1991. The DPU authorized a 9.8% ROE - slightly greater than the nationwide average for natural gas distribution utilities - and implemented full revenue decoupling, which should provide a greater level of stability and predictability to earnings and cash flows.

Capex to Pressure Financial Metrics: Financial metrics are likely to remain supportive of NSTAR Gas' ratings, but will be pressured in the near term by the utility's accelerated pipe replacement program. Fitch expects adjusted debt/EBITDAR to exceed 4.0x through 2018 before returning to less than 4.0x in 2019, while FFO fixed-charge coverage is expected to remain greater than 5.0x. Despite the financial metrics being weaker through 2018 than previously expected, DPU pre-approval of pipe replacement capex mitigates cost recovery risk.

Gas System Enhancement Program: On Jan. 1, 2016, NSTAR Gas implemented its Gas System Enhancement Program (GSEP), which accelerates the replacement of certain natural gas distribution facilities to within 25 years. This program should improve the reliability and safety of the utility's distribution system and provide a clearer long-term investment strategy. A DPU-approved tariff enables NSTAR Gas to recover costs affiliated with the GSEP on an annual basis. Management expects total GSEP capex of $255 million over 2016-2019.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions for Eversource include:

--Rate base growing from $14.7 billion at year-end 2015 to $18.3 billion at year-end 2019 (excluding Access Northeast and Clean Energy Connect);

--Total capex of $9.2 billion over 2016-2019 (excluding Access Northeast and Clean Energy Connect);

--Flat electric sales growth;

--Natural gas customer count increasing 2%-3% per year over 2016-2019;

--O&M reductions of 2%-3% per year over 2016-2019;

--Northern Pass Transmission completed in 2019.

Key Fitch forecast assumptions for CL&P include:

--Flat electric sales growth through 2019;

--EBITDA margin of 33%-35% over 2016-2019;

--Transmission capex totaling $973 million over 2016-2019.

Key Fitch forecast assumptions for NSTAR Electric include:

--Flat electric sales growth through 2019;

--EBITDA margin of 30.5%-33% over 2016-2019;

--Transmission capex totaling $905 million over 2016-2019.

Key Fitch forecast assumptions for PSNH include:

--Flat electric sales growth through 2019;

--Transmission capex totaling $271 million over 2016-2019;

--PSNH's generation assets divestiture in first half of 2017.

Key Fitch forecast assumptions for WMECO include:

--Flat electric sales growth through 2019;

--EBITDA margin of 34%-36% over 2016-2019;

--Transmission capex totaling $255 million over 2016-2019.

Key Fitch forecast assumptions for NSTAR Gas include:

--Customer growth of 2%-3% per year through 2019;

--EBITDA margin of 19%-22% over 2016-2019;

--Gas System Enhancement Program capex totalling $255 million over 2016-2019.

RATING SENSITIVITIES

Eversource:

Positive Rating Action: A one-notch upgrade to Eversource's Long-Term IDR would likely occur if Fitch were to expect adjusted debt/EBITDAR to average around 4.0x and FFO adjusted leverage to average around 4.5x on a sustained basis. In addition, Fitch would look for construction to begin on the NPT project and for greater clarity regarding the impact the project would have on Eversource's financial metrics.

Negative Rating Action: A negative rating action could occur if Fitch were to expect adjusted debt/EBITDAR to exceed 4.75x and FFO adjusted leverage to exceed 5.25x on a sustained basis. Adverse regulatory outcomes pose the greatest risk to ratings.

CL&P, PSNH, NSTAR Gas:

Positive Rating Action: A positive rating action could occur if Fitch were to expect adjusted debt/EBITDAR to decrease to less than 3.0x and FFO adjusted leverage to decrease to less than 3.5x on a sustainable basis.

Negative Rating Action: A negative rating action could occur if Fitch were to expect adjusted debt/EBITDAR to exceed 4.0x and FFO adjusted leverage to exceed 4.5x on a sustainable basis.

NSTAR Electric:

Positive Rating Action: A positive rating action could occur if Fitch were to expect adjusted debt/EBITDAR to decrease to less than 2.5x and FFO adjusted leverage to decrease to less than 3.0x on a sustainable basis. However, ratings upside is restricted by a maximum two-notch differential between the Long-Term IDRs of NSTAR Electric and Eversource.

Negative Rating Action: A negative rating could occur if Fitch were to expect adjusted debt/EBITDAR to exceed 3.5x and FFO adjusted leverage to exceed 4.0x on a sustained basis. Ratings would also be downgraded if Eversource's Long-Term IDR were downgraded, given Fitch's maximum allowed two-notch differential between the Long-Term IDRs of the two entities.

WMECO:

Positive Rating Action: A positive rating action is not likely due to the already strong rating and the utility's small scale of operations. Small changes in earnings and cash flows can result in a significant impact on financial metrics.

Negative Rating Action: A negative rating action could occur if Fitch were to expect adjusted debt/EBITDAR to exceed 4.0x and FFO adjusted leverage to exceed 4.5x on a sustained basis.

LIQUIDITY

Liquidity is considered adequate for Eversource and each of its subsidiaries.

Eversource, CL&P, PSNH, WMECO, 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 commercial paper (CP) program, which Eversource uses to provide its subsidiaries with intercompany loans.

Under the RCF, CL&P has a $600 million borrowing sublimit, PSNH and WMECO each have a $300 million borrowing sublimit, and NSTAR Gas and Yankee Gas Services Company (Yankee Gas, not rated by Fitch) each have a $200 million borrowing sublimit. As of March 31, 2016, Eversource had $621 million in short-term borrowings outstanding under its CP program, leaving $829 million of available borrowing capacity. CL&P, PSNH, and WMECO had $115.5 million, $157.1 million, and $143.5 million, respectively, in outstanding intercompany loans from Eversource as of March 31, 2016.

NSTAR Electric maintains its own $450 million RCF that terminates on Sept. 4, 2020. The RCF serves to backstop an equal-sized CP program. As of March 31, 2016, NSTAR Electric had $148.5 million in short-term borrowings, leaving $301.5 million of available capacity.

Eversource and its utility subsidiaries require modest cash on hand; Eversource had $51 million unrestricted as of March 31, 2016.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings; the Long-Term IDRs have a Stable Rating Outlook:

The Connecticut Light and Power Company

--Long-Term IDR to 'A-' from 'BBB+';

--Senior secured debt to 'A+' from 'A';

--Senior unsecured debt and revenue bonds to 'A' from 'A-';

--Preferred stock to 'BBB+' from 'BBB'.

Public Service Company of New Hampshire

--Long-Term IDR to 'A-' from 'BBB+';

--Senior secured debt to 'A+' from 'A'.

Western Massachusetts Electric Company

--Long-Term IDR to 'A-' from 'BBB+';

--Senior unsecured debt and revenue bonds to 'A' from 'A-'.

Fitch has affirmed the following ratings; the Rating Outlook on the Long-Term IDR is revised to Positive from Stable:

Eversource Energy

--Long-Term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-Term IDR at 'F2';

--Commercial paper at 'F2'.

Fitch has affirmed the following ratings; the Long-Term IDRs have a Stable Rating Outlook:

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+'.

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

Recovery Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878227

Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869259

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008519

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008519

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Kevin L. Beicke, CFA, +1-212-908-0618
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Hornick, +1-212-908-0523
Senior Director
or
Committee Chairperson
Philip W. Smyth, CFA, +1-212-908-0531
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]


Source: Business Wire (July 6, 2016 - 5:08 PM EDT)

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