Fitch Ratings Affirms Northeast Utilities & Subsidiaries; Outlook Stable.NEW YORK New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed the ratings of Northeast Utilities (NU) and its subsidiaries, Connecticut Light & Power (CL&P), Public Service Co. of New Hampshire New Hampshire, one of the New England states of the NE United States. It is bordered by Massachusetts (S), Vermont, with the Connecticut R. forming the boundary (W), the Canadian province of Quebec (NW), and Maine and a short strip of the Atlantic Ocean (E). (PSNH PSNH Public Service of New Hampshire
PSNH Portsmouth, New Hampshire ), and Western Massachusetts Electric Co. (WMECO WMECO Western Massachusetts Electric Company ) as follows:
--Issuer Default Rating (IDR IDR
In currencies, this is the abbreviation for the Indonesian Rupiah.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) at 'BBB';
--Senior unsecured debt Unsecured debt
Debt that does not identify specific assets that the debtholder is entitled to in case of default. at 'BBB'.
Connecticut Light & Power Company
--Issuer Default Rating (IDR) at 'BBB';
--First and refunding mortgage debt at 'A-';
--Senior unsecured and second-mortgage pollution control bonds at 'BBB+';
--Preferred stock at 'BBB'.
Public Service Co. of New Hampshire
-- Issuer Default Rating (IDR) at 'BBB';
--Senior secured debt at 'BBB+'.
Western Massachusetts Electric Company
--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured bonds at 'BBB+'.
The Rating Outlook for all entities remains Stable.
NU's ratings and outlook reflect the relatively predictable cash flows of its regulated utility subsidiaries, low commodity price risk, adequate liquidity and the reduced business risk resulting from NU's exit from the non-regulated marketing, generation and energy services businesses. Commodity price risk at utility subsidiaries Connecticut Light & Power (CL&P) and Western Massachusetts Electric Co. (WMECO) has been hedged via full requirements contracts with third party suppliers. Public Service Co. of New Hampshire (PSNH), which still owns approximately 1,150 MW of generation, is allowed to recover any excess purchased power and fuel costs through its stranded cost recovery charge.
While NU's exit from competitive operations results in the loss of associated earnings and cash flow from such businesses, the recent sale of the company's generating assets provided significant cash proceeds that the company can utilize to finance its large capital expenditure program. Capital expenditures at NU's regulated utilities for upgrading and expanding transmission and distribution (T&D) systems are expected to total approximately $4.9 billion over the next five years, a bulk of which ($3.4 billion or 70%) is at CL&P. The high rate of new investment in electric transmission facilities by CL&P entails some execution risk and external funding needs, but over the longer term it will result in a higher proportion of operating cash flows Operating cash flow
Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. at CL&P, and the consolidated group level derived from a more stable and lower risk activity.
NU anticipates funding its system expansion primarily through a mix of internally generated cash and future debt issuances. Notwithstanding NU's lower consolidated business risk profile, in the event that future cash flow is less than projected or actual capital costs exceed expectations, financing these expenditures with a mix of equity and debt consistent with its current credit profile remains a key to maintain existing ratings.
NU's consolidated credit metrics are expected to improve relative to recent levels as a result of the sale of its non-regulated businesses. However, debt leverage as measured by the ratio of total adjusted debt to funds from operation (FFO FFO
See: Funds from operations ), in particular is expected to be more in line with lower rated peers as incremental capital expenditures are financed with debt over the next several years. Total adjusted debt to FFO is expected range between 7-7.5 times (x) while interest coverage as measured by the ratio of FFO to interest is expected fall in the 3.5-4x range. Importantly, there are mechanisms in place that allows for timely recovery of the company's Federal Energy Regulatory Commission The Federal Energy Regulatory Commission (FERC) is the United States federal agency with jurisdiction over electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates. (FERC FERC Federal Energy Regulatory Commission
FERC FEMA Emergency Response Capability ) regulated transmission investments. Over 90% of NU's planned transmission expenditures are expected to be included in the regional planning process and as such earn approximately 12.4% return on equity (ROE) as approved by FERC. In addition, the company benefits from being able to add 50% of construction work in progress into rate base for its southwestern Connecticut projects.
CL&P's ratings and outlook reflect the stable cash flows from its regulated T&D business as well as the existence of adequate mechanisms that allow for recovery of the company's substantial transmission investments as well as the full recovery of energy, congestion The condition of a network when there is not enough bandwidth to support the current traffic load.
congestion - When the offered load of a data communication path exceeds the capacity. and transmission costs. In addition, CL&P is exposed to regulatory uncertainty through its planned distribution base rate filing expected mid-year 2007 to be effective early 2008. Fitch notes that the credit measures for CL&P and the consolidated group are relatively weak compared to peers.
Fitch's Stable Outlook assumes that the outcome of CL&P's distribution rate case in January 2008 is consistent with Fitch's forecast, resulting in some improvement in financial measures relative to actual 2006 results.
Separately, inadequate equity funding Equity funding
An investment consisting of a life insurance policy and a mutual fund. The insurance policy is paid by the collateral value of fund shares, giving the investor the advantages of insurance protection with the growth potential of a mutual fund. of the capital build-out or delays in the regulatory recovery of these costs could lead to negative rating action.
The ratings of PSNH and WMECO reflect their predictable cash flows and relatively low commodity price risk as described above. Debt leverage at both utilities is expected to increase over the next several years as they implement their respective T&D investment related spending plans. While transmission related investments are subject to favorable FERC recovery mechanisms, both utilities are expected to go recover their distribution investments through periodic rate filings over the next several years.
Through its regulated subsidiaries, CL&P., PSNH, WMECO and Yankee Gas Services, NU provides power and gas to a total of 2.1 million residential, commercial and industrial customers in New England. In 2006, NU divested a majority of its unregulated businesses.
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