New York, December 12, 2011 -- Moody's Investor Services affirmed today the ratings of Connecticut
Light and Power Company (CL&P; Baa1 senior unsecured rating)
and its parent, Northeast (NU; Baa2 senior unsecured).
The rating outlook for CL&P and NU remains stable. Moody's
affirmed the ratings and maintained the stable outlook because it expects
NU to eventually be able to recover in some manner the material restoration
costs its electric subsidiaries experienced following Tropical Storm Irene
and the late October snow storm. Nevertheless, Moody's
remains concerned over the negative impact these costs and the increased
public scrutiny will have on CL&P's and NU's financial
and operational performance over the near term.
The affirmation further assumes that the merger between NU and NSTAR despite
the delay to 2012 will be approved and implemented in a credit supportive
way such that, as currently anticipated, the group does not
employ an aggressive financing strategy in terms of increased indebtedness
to fund the group's planned substantial capex program over the next
several years.
RATINGS RATIONALE
The affirmation follows NU's public estimation on December 7,
2011, that the restoration costs associated with the snowstorm that
severely impacted the service territory of its three electric subsidiaries,
CL&P, WMECO and PSNH, will aggregate to about $202.5
million. Tropical Storm Irene had already caused severe damages,
especially to CL&P's distribution system, with incremental
restoration costs for all three electric utilities estimated at around
$120 million.
In terms of outages, the October snowstorm was the largest storm
in the history of CL&P and Western Massachusetts Electric Company
(WMECO) and the third largest for Public Service Company of New Hampshire
(PSNH). The wet snow on the still leaf-laden trees caused
many of them to fall resulting in extensive damages, particularly
to the transmission system. At the peak of the outages, almost
1.2 million of NU's total customers were without power,
specifically about 830,000 of CL&P's customer base (approximately
69%), 237,000 of PSNH's (about 47%) and
140,000 of WMECO's (around 70%) customers were left
without power. Despite the material aid received from the electric
utility industry under the utilities' mutual assistance commitments,
CL&P could not fully restore service before November 9, 11 days
after the storm hit. In the aftermath of the storms, CL&P
has been exposed to significant public scrutiny regarding its storm readiness
and management of both emergency situations.
NU has indicated that WMECO's and PSNH's restoration costs
associated with the snowstorm will amount to around $23.5
million and $16.2 million, respectively, while
at CL&P it expects these costs to be approximately $163 million
including the $30 million ($18 million after-tax)
fund set up at the end of November 2011 to assist around 200,000
eligible customers who were still without power after noon November 5th.
As a result, Moody's anticipates NU and its subsidiaries,
especially CL&P, to report significant deterioration over the
near term in their key credit metrics, given the magnitude of the
damage as compared to the CL&P's annual internally generated
cash flows of around $600 million (net of Rate Reduction bonds).
Specifically, Moody's calculates that CL&P's CFO
pre-W/C to debt could drop to below 13% over the near term
compared to the 20.6% level registered for the trailing
twelve months ended September 2011.
Given the sizeable damages associated with the 2011 storms it appears
that the rates under CL&P's current cost recovery mechanism
for major storms is clearly insufficient, as they are based on the
significantly lower historical major storm related costs incurred between
2004 and 2009. Under the terms of the June 2010 two-year
rate case decision, CL&P can collect from customers $3
million p.a. for major storms, which are defined as
those with an incremental cost that exceeds $5 million with a reserve
balance up to $7.8 million. That said, Moody's
affirmation incorporates an expectation that the utility will be able
to recover the 2011 material restoration costs in some kind of fashion
since the utility operates under a regulatory framework that Moody's
views as being reasonably on par to slightly below average with that of
most other jurisdictions in the US in terms of credit supportiveness.
Moody's also expects management to fund the restoration costs prudently,
as well as any additional costs arising from operational requirements
that may be imposed on the utility in the aftermath of the storms,
and future planned investments.
On December 7, 2011, NU indicated that it expects that its
merger of equals in a stock-for-stock transaction with NSTAR
to close in early 2012 after the receipt of pending approvals by the Nuclear
Regulatory Commission (expected in late December) and the Massachusetts
Department of Public Utilities (expected in early 2012). As a result,
the termination date was extended to April 2012 in October 2011.
NU will be the surviving corporate entity with NSTAR becoming a wholly-owned
subsidiary. NU's and NSTAR's former shareholders will hold around
56% and 44%, respectively, of the post-transaction
company.
The affirmation further assumes that the merger between NU and NSTAR will
be approved and will not be subject to any material or onerous conditions
such that the merged companies, particularly NU, will not
need to incur significant additional debt to fund the substantial capex
program given the current free cash flow positive operations of NSTAR.
Should the merger not be approved or be subject to onerous conditions,
maintaining the current ratings will depend on the corporate finance decisions
that NU's management makes on funding of the group's planned
investments, particularly in terms of any material reliance on new
indebtedness.
CL&P's and NU's stable outlook incorporates the assumption
that 2011 storm restoration costs will be recovered. It also assumes
that the merger will be completed under credit-supportive terms
and that management will follow prudent financing strategies such that
CL&P and NU report over the medium term key credit metrics that are
commensurate with their current rating category; specifically for
CL&P a CFO pre-W/C to debt and CFO pre-W/C interest
coverage of at least 20% and 4x, respectively. NU's
stable outlook incorporates the structural subordination that exists for
parent-level debt holders relative to the existing debt outstanding
at its utility subsidiaries.
In light of the anticipated substantial deterioration of CL&P's
and NU's credit metrics in the aftermath of the 2011 storms,
the prospects for the ratings of CL&P or NU to be upgraded in the
near-term are limited. Over the medium to long term,
CL&P's ratings could be upgraded if the company were able to
achieve a significant improvement in its financial profile. For
example, if there were a substantial improvement in the credit supportiveness
of the regulatory frameworks under which the utility operates and prudent
financial policies that fostered CFO pre-W/C to debt and interest
coverage reaching levels in excess of 22% and near 4.5x,
respectively, on a sustainable basis. Moody's could
consider NU's ratings for upgrade following an upgrade of its subsidiaries'
ratings especially its largest subsidiary, CL&P. An upgrade
would also be considered if there were an improvement in the consolidated
financial and operating profile following the merger, and if prudent
financial policies were implemented to fund the group's material
investments. For example, an upgrade would be considered
if NU were able to achieve consolidated CFO pre-W/C to debt and
interest coverage above 19% and closer to 4.5x, respectively,
for a sustained period of time.
CL&P's ratings could be downgraded if the near-term deterioration
in key credit metrics extends over a longer period of time than Moody's
currently anticipates amid a significant increase in the utility's
indebtedness to fund its substantial capital outlay programs. Other
possible events that would add negative pressure on the rating include
increased operational cost requirements, the company not being able
to recover the restoration costs associated with the severe 2011 storms
in a relatively timely manner, and the proposed merger between NU
and NSTAR not being approved or being subject to conditions that Moody's
does not consider credit supportive. A rating downgrade could be
triggered if Moody's anticipates that the company will report key
credit metrics that are weak for its current rating category, specifically
CFO pre-W/C to debt and CFO pre-W/C interest coverage below
18% and 4x, respectively, on a sustainable basis.
NU's rating is likely to be downgraded following a downgrade of
its subsidiaries' ratings given the structural subordination embedded
in its ratings. If the ongoing merger with NSTAR is not approved,
the ratings of NU and its subsidiaries are likely to experience negative
rating pressure unless management decides to rely less than we currently
anticipate on new indebtedness to fund the group's growth programs,
such that the metrics of NU and the subsidiaries remain reasonably commensurate
with their current rating categories.
The principal methodology used in rating CL&P and NU was Regulated
Electric and Gas Utilities rating methodology published in August 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
Headquartered in Berlin, CT, The Connecticut Light and Power
Company (CL&P; Baa1; stable) with more than 1.2 million
customers is the state's largest regulated electric transmission and distribution
utility. CL&P's operations are regulated by the Public Utilities
Regulating Authority (PURA; former Department of Public Utility Control)
and the Federal Energy Regulatory Commission (FERC). Should the
merger between NU and NSTAR close, CL&P will rank as the group's
largest subsidiary with total assets of approximately $8.4
billion as of September 30, 2011, closely followed by NSTAR
(A2; stable) that reported assets of around US$ 7.7
billion at the end of the same period.
Headquartered in Hartford, Connecticut, Northeast Utilities
(NU; Baa2 Senior Unsecured) is a utility holding company of a largely
regulated utilities group, including the vertically integrated utility,
Public Service Company of New Hampshire (PSNH; Baa2, stable);
the electric transmission and distribution utilities CL&P and Western
Massachusetts Electric Company (WMECO; Baa2, stable);
and the local gas distribution (LDC) utility, Yankee Gas Services
Company (YGS; Baa2; stable). NU's unregulated businesses
consist mainly of an energy services business and a few remaining wholesale
marketing contracts (Select Energy Inc.) that expire in 2013 as
this business winds down. As of September 2011, NU's consolidated
assets amounted to around $14.7 billion.
Headquartered in Boston, NSTAR is a holding company and parent for
the regulated electric transmission and distribution utility and the group's
largest subsidiary, NSTAR Electric Company (A1; stable),
and the LDC utility, NSTAR Gas Company (unrated), and some
other small non-regulated subsidiaries, including telecommunications
and liquefied natural gas service operations. NSTAR Electric and
NSTAR Gas are regulated by the MDPU and FERC.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 31 January
2012. ESMA may extend the use of credit ratings for regulatory
purposes in the European Community for three additional months,
until 30 April 2012, if ESMA decides that exceptional circumstances
arise that may imply potential market disruption or financial instability.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has
issued the rating.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
Natividad Martel
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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Moody's affirms the ratings of CL&P and NU; outlook remains stable
