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Announcement:

Moody's: CL&P's rate case decision is credit negative but not enough to prompt any rating action

18 Dec 2014

New York, December 18, 2014 -- Moody's Investors Service comments on the Connecticut Public Utilities Regulatory Authority (PURA) final decision regarding the rate case of Connecticut Light and Power Company (CL&P; Baa1 stable) dated December 17, 2014. This decision follows PURA's draft decision issued on December 1, 2014 and concludes the rate case based on test year 2015 initiated six months ago after the utility's initial filing early June 2014. PURA approved a $134.1 million increase in the utility's revenues . This equates to a 13.9% increase in distribution rates or around 61% of CL&P's sought $221.1 million base rate hike as revised in September.

On a less positive note, the requested rate base increase included over $95 million in pre-approved items, namely the recovery of :

(1) $25.3 million resiliency spending through base rates. The utility was already recouping this amount through its non-bypassable federally mandated congestion charges (NBFMCC) during the rate base freeze period that was set to expire on December 1, 2015. PURA approved this multi-year spending program in January 2013 as part of the $300 million multi-year resilience enhancement plan for increased vegetation management and structural and electric hardening (total spending in 2015: $61 million; $77 million p.a. in 2016 and 2017). This program as well as the rate freeze were part of the settlement agreement entered into in mid March 2012 by NU and NSTAR with the Attorney General and the Consumer Counsel for the State of Connecticut to authorize the April 2012 merger. As part of this rate case, CL&P also proposed $44 million for new system resilience spending which we understand the utility will recover via the NBFMCC albeit subject to PURA's future review subject to the re-opening of Docket No. 12-07-06 proceeding as well as;

(2) the first installment in deferred restoration costs associated with five major storms that affected the utility's service territory during 2011 and 2012, including at the end of October 2011 an early Nor'easter and Super-storm Sandy at the beginning of November 2012. In March 2014, PURA authorized the utility the recovery of $365 million of storm costs over a six year period (with carrying charges) through 2020. However, to mitigate the impact on the end-user's distribution electric bills CL&P proposed and PURA approved to use through March 2015 the $65.4 million received in June 2014 in connection with the payments from the US Department of Energy (DOE). This results from the positive outcome in March of the litigation filed in 2007 against the DoE related to its failure to provide for a permanent facility to store spent nuclear fuel generated by the three Yankee inactive regional nuclear generation companies after 2001 and 2002 (DOE Phase II Damages). CL&P is a stockholder in these companies along with its four affiliate electric companies and other New England electric utilities. This refund amount largely drives the difference between CL&P's $231.6 million rate hike initially sought in June and its revised request in September.

As part of this rate case CL&P had also requested recovery in rates of $116.7 million in distribution operating deficiencies. This is based on a forward test year ending on November 30, 2015 and excluded $36 million in operation and maintenance (O&M) cost savings that resulted from efficiency improvements, financial management (including pension costs) and merger integration. PURA's draft authorizes only around $39 million, another credit negative. We calculate that the $77 million difference between the authorized and requested resulted from:

(i) lower approved operational costs (around 55% of the gap) including depreciation ($6.3 million) as well as taxes and O&M costs (about $30 million). Some of the disallowed expenses include internal rental ($1.7 million) and additional storm reserves ($6 million) as well as employee incentive and benefits ($7.4 million). That said, we also understand that CL&P corrected during the rate case process certain previously submitted amounts including $1.8 million in connection with resiliency O&M costs;

(ii) a reduction to $3.2 billion in CL&P's rate base (difference: around $174 million) as well as in the Return on Equity (RoE). CL&P was authorized to recoup rates for its proposed 2015 investments of $257 million, a credit positive. However, PURA reviewed downward the cash working capital allowance ($2.4 million), other reserves ($1.8 million), and accumulated deferred income taxes (around $170 million). On a positive note, PURA decided to reopen the latter item to review the evidence submitted by CL&P in the written exception it filed after the draft order. PURA has directed CL&P in the interim to apply regulatory asset treatment to this item which could result in additional revenue of $22 million.. PURA authorized CL&P's proposed 50.38% common equity ratio but it only allowed a 9.17% RoE. This is significantly lower than the utility's requested 10.2% RoE and a reduction compared to the utility's previously authorized 9.4% RoE. We acknowledge that CL&P's cash flows will now benefit from the implementation of a decoupling mechanism as mandated by the House Bill 6360 enacted in July 2013; however, this approved RoE compares poorly with other US-electric utilities including those also that also have decoupling. The latter include, for example, the 9.6% RoE authorized to CL&P's sister company Western Massachusetts Electric Company.

In terms of the rate design, PURA allowed an increase in the utility's monthly fixed charges for residential and small commercial classes. The increase was allowed to better align the utility's rate structure and its fixed cost components of rendering its service to these customers, particularly amid growing distributed generation. However, the authorized increase by about $3.50 to $19.25 and $23.75, respectively, was significantly lower than the requested increases of around $9.5. Therefore, the fixed service charges will now approximate 14% of these customers' total bill compared to the 12% under the previous rate design. While the utility's exposure to variable rates is still material, we acknowledge that the partial decoupling helps mitigate the impact of material volatility in power demand.

We further note that for the 2015 period PURA also cut by an additional 15 basis points to 9.02% CL&P's RoE such that the revenue will effectively increase by $129.7 million in 2015. In August 2012, PURA had concluded that CL&P's response to the 2011 major storms was deficient and inadequate in many key areas and indicated that in its next ratemaking proceeding CL&P may be subject to an appropriate reduction to its allowed RoE. According to PURA's 2014 order the sanctions' goal was to incentivize better storm responses in the future. That said, it acknowledges that CL&P has already implemented improved resilience measures such that the amount of the imposed sanction was less stringent than the 35 bp reduction requested by the Office of Consumer Counsel (OCC) and the Attorney General (AG). This RoE-adjustment will reduce CL&P's revenues in 2015 to $129.7 million.

On a separate note, the final decision followed PURA's decision in November to allow CL&P to adjust its standard service rates for its last resort customers on January 1, 2015. This will increase to cents 12.6/KWh from under cents 10/KWh to reflect the higher generation rates that resulted from the competitive auctions held earlier this year. This accounted for around half of the residential users' bills. Other regional utilities also experienced significant spikes. According to CL&P, these spikes resulted from pipeline limitations amid the regional growing dependency on natural gas.

Except for the approved decoupling mechanism the final order raises some questions as whether CL&P is benefiting from the perceived improvement in the Connecticut regulatory environment in terms of credit supportiveness and a better relationship with PURA. That said, our final view will depend on the outcome of the reopening ordered by PURA regarding the ADIT issue. If reviewed upward as requested by CL&P, the gap between the requested and authorized recovery of distribution operating deficiencies would drop to $55 million (equivalent 52.6% of the requested $116.7 million; compared to the current 33% level)

CL&P's Baa1 rating and stable outlook consider the utility's growing exposure to FERC's regulatory environment via its transmission operations as well as our expectation that, despite this rate case outcome, the company will be able to record credit metrics that remain well positioned within the Baa-rating category. Specifically, that its 3-year average CFO pre-W/C to debt metric will remain in the mid to high teens and its RCF to debt metric in the mid teens, respectively.

Headquartered in Berlin, The Connecticut Light and Power Company with around 1.2 million customers is the state's largest regulated electric transmission and distribution (T&D) utility. Its transmission and distribution rate bases hover around $2.2 billion and $3.2 billion, respectively.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: CL&P's rate case decision is credit negative but not enough to prompt any rating action
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