April 5, 2012 / 8:52 PM / 5 years ago

TEXT-S&P raises Northeast Utilities rating

Overview	
     -- U.S. diversified energy companies Northeast Utilities and NSTAR have 	
received final regulatory approval for their merger, which we expect will 	
close before April 16, 2012.	
     -- We have lowered our ratings on NSTAR and subsidiaries NSTAR Electric 	
Co. and NSTAR Gas Co., including lowering the long-term corporate credit 	
ratings to 'A-' from 'A+', and removed the ratings from CreditWatch with 	
negative implications. We lowered the short-term ratings on NSTAR and NSTAR 	
Electric to 'A-2' from 'A-1'.	
     -- Upon completion of the transaction, NSTAR will be renamed NSTAR LLC, 	
and will cease to exist. As surviving entity, NSTAR LLC will assume all 	
obligations under the senior unsecured notes that were previously issued by 	
NSTAR.	
     -- We have raised our ratings on Northeast Utilities (NU) and 	
subsidiaries Connecticut Light & Power Co. (CL&P), Public Service Co. of New 	
Hampshire (PSNH), Western Massachusetts Electric Co. (WMECO), and Yankee Gas 	
Services Co., including raising the long-term corporate ratings to 'A-' from 	
'BBB+', and removed the ratings from CreditWatch with positive implications.	
     -- The consolidated entity has an excellent business risk profile and a 	
significant financial risk profile, in our assessment.	
     -- The stable rating outlook on the consolidated entity and its 	
subsidiaries reflects its consistent, regulated electric and natural gas 	
businesses that have low operating risk and which we expect will generate 	
sufficient cash flow.	
	
Rating Action	
On April 4, 2012, Standard & Poor's Ratings Services lowered its long-term 	
corporate credit ratings on NSTAR and its subsidiaries, NSTAR Electric Co. and 	
NSTAR Gas Co., to 'A-' from 'A+' and lowered the short-term ratings on NSTAR 	
and NSTAR Electric to 'A-2' from 'A-1'. We also lowered our ratings on NSTAR's 	
senior unsecured debt to 'BBB+' from 'A' and on NSTAR Electric's senior 	
unsecured debt to 'A-' from 'A+'. At the same time, we lowered our ratings on 	
NSTAR Electric's preferred stock to 'BBB' from 'A-' and on NSTAR Gas' senior 	
secured debt to 'A' from 'AA-'; the recovery rating on NSTAR Gas' senior 	
secured debt is unchanged at '1+' based on collateral coverage of more than 	
1.5x.	
	
At the same time, we raised our corporate credit ratings on Northeast 	
Utilities (NU) and its subsidiaries, Connecticut Light & Power Co. (CL&P), 	
Public Service Co. of New Hampshire (PSNH), Western Massachusetts Electric Co. 	
(WMECO), and Yankee Gas Services Co., to 'A-' from 'BBB+'. We raised the 	
rating on NU's senior unsecured debt to 'BBB+' from 'BBB' and raised the 	
ratings on CL&P's, PSNH's, and WMECO's senior unsecured debt to 'A-' from 	
'BBB+'. In addition, we raised our ratings on NU's and CL&P's preferred stock 	
to 'BBB' from 'BBB-'. We affirmed our 'A-' ratings on CL&P's and PSNH's senior 	
secured debt; the '1' recovery ratings on this debt, which is based on 	
collateral coverage of 1x, is unchanged.	
	
Approximately $7.5 billion of consolidated debt was outstanding at Dec. 31, 	
2011. This includes $5.2 billion of debt at NU and $2.3 billion of debt at 	
NSTAR.	
	
We removed our ratings on NU and its subsidiaries from CreditWatch, where we 	
placed them with positive implications on Oct. 18, 2010. We also removed our 	
ratings on NSAR and its subsidiaries from CreditWatch, where we placed them 	
with negative implications on Oct. 18, 2010. The rating outlook on all 	
entities is stable.	
	
Rationale	
The rating actions are attributable to the imminent consummation of the 	
all-stock merger between NU and NSTAR. Upon completion of the transaction, 	
NSTAR will be renamed NSTAR LLC, and will cease to exist. As the surviving 	
entity, NSTAR LLC will assume all obligations under the senior unsecured notes 	
that were previously issued by NSTAR, and will become a subsidiary and an 	
intraholding company of parent holding company NU.	
	
The ratings on the consolidated entity reflect an "excellent" business risk 	
profile and a "significant" financial risk profile under our criteria. The 	
business risk profile is supported by a focus on the relatively low operating 	
risk of regulated electric and gas transmission and distribution operations, 	
reliable and efficient operations, solid competitive standing, and geographic, 	
economic, and regulatory diversity. The customer base is largely residential 	
and commercial, which provides for a reasonably stable and predictable revenue 	
stream and some insulation from cyclical volatility. The combined entity will 	
generate about 70% of operating cash flow from Massachusetts, Connecticut, and 	
New Hampshire, while the balance will be Federal Energy Regulatory Commission 	
(FERC) regulated. We view FERC regulation favorably and regulation in 	
Massachusetts and New Hampshire as credit supportive. The aforementioned 	
attributes are tempered by a historically challenging regulatory environment 	
in Connecticut, which we view as less credit supportive, and a distribution 	
rate freeze in Massachusetts and Connecticut that will prohibit the utilities 	
from seeking rate relief despite new investment in distribution facilities.	
	
NU's significant financial risk profile reflects our expectation that debt 	
leverage will remain somewhat liberal and that its heavy capital spending 	
program will necessitate some reliance on external financing. In that regard, 	
our baseline forecast reflects adjusted debt to total capital and adjusted 	
funds from operations (FFO) to total debt that hovers around 53% to 54% and 	
17% to 18%, respectively, in nearby years. In addition, we expect that the 	
management team will continue to do a good job of managing regulatory risk, 	
implementing risk management strategies, controlling expenses, providing high 	
quality service, and will avoid risky unregulated activities. We believe that 	
management depth, specificity, and transparency in its financial goals are 	
consistent with the significant financial profile.	
	
NU and NSTAR agreed to provide rate credits and rate freezes, and to invest in 	
renewable energy, adopt new energy efficiency targets, and meet other 	
concessions. In Massachusetts, the companies agreed to freeze distribution 	
rates at NSTAR Electric, NSTAR Gas, and WMECO until 2016 and give rate payers 	
a one-time credit totaling $21 million. The companies also agreed to purchase 	
power from the planned Cape Wind Offshore facility. In Connecticut, NU agreed 	
to freeze distribution rates at CL&P until Dec. 1, 2014, with a one-time $25 	
million rate credit, to forego recovery of $40 million of $260 million of 	
storm costs it incurred in 2011, and to defer the remaining costs until 	
December 2014. While not onerous conditions, 2011 storm costs are subject to 	
commission review, rendering full cost recovery uncertain.	
	
The merger transaction will combine two relatively low-risk companies in 	
contiguous service areas with similar corporate strategies. NU, which will be 	
the largest utility in New England, will continue to concentrate on its core 	
utility rate base, with increasing investments primarily in transmission 	
projects. The transmission investments provide for attractive allowed returns 	
on equity (ROEs) and recovery of financing costs for some of the major 	
projects during the construction period, which helps to enhance cash flow and 	
provide earnings stability. The merged company will serve 3 million electric 	
and 500,000 gas customers in three states. CL&P, WMECO, and NSTAR Electric are 	
electric transmission and distribution companies. In contrast, PSNH remains a 	
fully integrated electric utility even though its customers can select 	
alternative electric supply providers, an arrangement that can lead to upward 	
pressure as fixed costs may need to be recovered over a smaller customer base. 	
Yankee Gas and NSTAR Gas are natural gas distribution companies.	
	
NU faces a heavy capital spending program, at about $7.9 billion from 2012 to 	
2016 (as disclosed in NU's and NSTAR's 2011 10-Ks), a significant portion of 	
which is targeted for new transmission projects, including the $1.1 billion 	
Northern Pass Transmission (NPT) project, a high-voltage direct-current line 	
extending from the Canadian border to Franklin, N.H., with completion slated 	
for late 2016. We view the NPT project as having somewhat higher risk than 	
FERC-regulated transmission projects because NPT will have a single off-taker, 	
Hydro-Quebec for the entire capacity. Nevertheless, the overall cost structure 	
of the project mimics the cost structure of FERC-approved projects, and the 	
transmission services agreement between NPT and Hydro-Quebec provides NPT with 	
a number of protections, including compensation should Hydro-Quebec abandon 	
the project. The balance of NU's planned construction expenditures are for 	
company-specific projects necessitating timely recovery of the investment 	
through rates to provide ongoing support to the financial profile. Overall, 	
the proposed capital spending program will meaningfully increase the 	
consolidated rate base.	
	
Given the large construction program, which will require some outside 	
financing, we expect that credit protection measures will be in the lower end 	
of the significant financial risk category. Prospectively, based on our 	
baseline forecast, we expect consolidated adjusted FFO to total debt to hover 	
around the high teens and total debt to EBIDTA to be about 4.5x. We also 	
expect total debt to total capitalization to approximate 53% to 54%, including 	
goodwill. We believe NU's consolidated financial measures will remain at 	
levels suitable for current ratings because of the prospects for higher 	
transmission rates, recovery of fuel costs and various tracking mechanisms 	
that allow for the timely adjustment of rates, projected net merger savings of 	
$784 million over 10 years, efficient operations, and credit supportive 	
actions by management.	
	
Recovery analysis	
We assign recovery ratings on first-mortgage bonds (FMBs) issued by 	
investment-grade U.S. utilities, which can result in issue ratings being 	
notched above a corporate credit rating (CCR) on a utility, depending on the 	
CCR category and the extent of the collateral coverage. We base the 	
investment-grade FMB recovery methodology on the ample historical record of 	
nearly 100% recovery for secured bondholders in utility bankruptcies and on 	
our view that the factors that supported those recoveries (limited size of the 	
creditor class, and the durable value of utility rate-based assets during and 	
after a reorganization, given the essential service provided and the high 	
replacement cost) will persist in the future. Under our notching criteria, 	
when assigning issue ratings on utility FMBs, we consider the limitations of 	
FMB issuance under the utility's indenture relative to the value of the 	
collateral pledged to bondholders, management's stated intentions on future 	
FMB issuance, and the regulatory limitations on bond issuance. FMB ratings can 	
exceed a CCR on a utility by up to one notch in the 'A' category, two notches 	
in the 'BBB' category, and three notches in speculative-grade categories. 	
	
NSTAR Gas' FMBs benefit from a first-priority lien on substantially all of the 	
utility's real property owned or subsequently acquired. Collateral coverage of 	
more than 1.5x supports a recovery rating of '1+' and an issue rating one 	
notch above the CCR. At CL&P and PSNH collateral coverage 1x supports a 	
recovery rating of '1' and an issue rating of 'A-', which is on par with the 	
CCR.	
	
Liquidity	
The short-term corporate credit and commercial paper ratings on NSTAR and 	
NSTAR Electric are 'A-2'. Liquidity is adequate under Standard & Poor's 	
corporate liquidity methodology, which categorizes liquidity in five standard 	
descriptors.	
	
Consolidated projected sources of liquidity, mainly operating cash flow and 	
available bank lines, exceed its projected uses, consisting mainly of 	
necessary capital expenditures, debt maturities, and common dividends, by more 	
than 1.2x. Further supporting our assessment of its liquidity as adequate is 	
the company's ability to absorb high-impact, low-probability events with 	
limited need for refinancing, its flexibility to lower capital spending, its 	
sound bank relationships, its solid standing in the credit markets, and its 	
generally prudent risk management.	
	
At the end of 2011, NU had revolving credit facilities totaling $900 million 	
with about $586 million available and NSTAR had $700 million credit facilities 	
which had no amounts outstanding, although NSTAR Electric had $141.5 million 	
commercial paper outstanding. NU maintains a $500 million credit facility and 	
its operating subsidiaries combined have $400 credit facility, both of which 	
expire on Sept. 24, 2013. NSTAR has a $175 million revolving credit facility 	
that expires on Dec. 31, 2012. NSTAR Electric maintains a $450 million 	
revolver that also expires on Dec. 31, 2012. And, on Dec. 8, 2011, NSTAR Gas 	
entered into a six-month $75 million credit agreement to replace its $100 	
million agreement that expired Dec. 9, 2011. The revolvers serve as backup to 	
NSTAR's and NSTAR Electric's commercial paper programs. We expect the company 	
to enter into new credit agreements within six months of maturity.	
	
NU, CL&P, PSNH, WMECO, Yankee Gas, NSTAR, NSTAR Electric and NSTAR Gas are 	
required to maintain a consolidated ratio of total debt to total capital of no 	
more than 65%, with which they comfortably comply with which they comfortably 	
comply with ratios of 57%, 49%, 49%%, 49%, 40% 55.5%, 45.4%, and 51.6%, 	
respectively at Dec. 31, 2011.	
	
On March 26, 2012, CL&P entered into a new $300 million five-year unsecured 	
revolving credit agreement that expires March 26, 2017, bringing the total 	
combined credit agreements to $1.9 billion.	
	
The consolidated entity has about $827 million remaining debt maturing in 2012 	
and $689 million in 2013. We expect that the company will refinance debt as it 	
matures.	
	
Given the company's concentration on relatively low-risk regulated 	
transmission and distribution operations, merger savings, better-than-average 	
service areas with very little industrial concentration, prospective cash 	
flows should be reasonably stable.	
	
Outlook	
The outlook on NU and its subsidiaries reflects the company's consistent, 	
regulated electric and natural gas businesses that have low operating risk and 	
which we expect will generate sufficient cash flow. Given the large capital 	
spending program and prospects for modest load growth, we expect that NU will 	
generate consolidated adjusted FFO to total debt of about 17%-18% over the 	
next few years and adjusted total debt to total capitalization of below 54%. 	
We will lower the ratings on NU if adjusted FFO to total debt declines below 	
15% on a consistent basis and debt leverage exceeds 55%. In light of the 	
company's heavy construction program, we don't anticipate a ratings upgrade 	
during our current forecast period. However, if adjusted FFO to total debt 	
consistently exceeds 20% we could raise the ratings one notch.	
	
Related Criteria And Research	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- Analytical Methodology, April 15, 2008	
     -- Ratios And Adjustments, April 15, 2008	
     -- Assessing U.S. Utility Regulatory Environments, Nov. 7, 2007	
	
	
Ratings List	
	
Upgraded; CreditWatch/Outlook Action	
                                        To                 From	
Northeast Utilities	
Public Service Co. of New Hampshire	
Yankee Gas Services Co.	
Connecticut Light & Power Co.	
Western Massachusetts Electric Co.	
 Corporate Credit Rating                A-/Stable/--       BBB+/Watch Pos/--	
	
Northeast Utilities	
 Senior Unsecured                       BBB+               BBB/Watch Pos	
	
Connecticut Light & Power Co.	
 Preferred Stock                        BBB                BBB-/Watch Pos	
	
Western Massachusetts Electric Co.	
 Senior Unsecured                        A-                 BBB+/Watch Pos	
	
Ratings Affirmed; CreditWatch/Outlook Action; Recovery Ratings Unchanged	
                                        To                 From	
Connecticut Light & Power Co.	
 Senior Secured                         A-                 A-/Watch Pos	
   Recovery Rating                      1                  1	
	
Public Service Co. of New Hampshire	
 Senior Secured                         A-                 A-/Watch Pos	
   Recovery Rating                      1                  1	
	
Downgraded; CreditWatch/Outlook Action; Recovery Ratings Unchanged	
                                        To                 From	
NSTAR	
NSTAR Electric Co.	
 Corporate Credit Rating                A-/Stable/A-2      A+/Watch Neg/A-1	
	
NSTAR Gas Co.	
 Corporate Credit Rating                A-/Stable/--       A+/Watch Neg/--	
	
NSTAR	
 Senior Unsecured                       BBB+               A/Watch Neg	
 Commercial Paper                       A-2                A-1/Watch Neg	
	
NSTAR Electric Co.	
 Senior Unsecured                       A-                 A+/Watch Neg	
 Preferred Stock                        BBB                A-/Watch Neg	
 Commercial Paper                       A-2                A-1/Watch Neg	
	
NSTAR Gas Co.	
 Senior Secured                         A                  AA-/Watch Neg	
  Recovery Rating                       1+                 1+

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