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Rating Action:

Moody's places Connecticut Light & Power's ratings on review for upgrade; affirms Yankee Gas' ratings with a stable outlook

08 Jun 2018

New York, June 08, 2018 -- Moody's Investors Service (Moody's) placed the long-term ratings of The Connecticut Light and Power Company (CL&P) on review for upgrade, including CL&P's Baa1 issuer rating and A2 first mortgage bond ratings. At the same time, Moody's affirmed Yankee Gas Services Company's (Yankee Gas) Baa1 long-term issuer rating with a stable outlook.

The review for upgrade on CL&P's ratings will focus on the company's financial performance going forward in respect to recent changes from US tax reform as well as our view of a sustained improvement in the credit supportiveness of the Connecticut regulatory environment as evidenced by CL&P's recent rate case settlement approved by the state's Public Utilities Regulatory Authority (PURA) in April 2018. We expect to conclude our review within the next 60 days.

On Review for Upgrade:

..Issuer: Connecticut Development Authority

....Senior Secured Revenue Bonds, Placed on Review for Upgrade, currently A2

....Senior Unsecured Revenue Bonds, Placed on Review for Upgrade, currently Baa1

..Issuer: Connecticut Light and Power Company

.... Issuer Rating, Placed on Review for Upgrade, currently Baa1

....Pref. Stock, Placed on Review for Upgrade, currently Baa3

....Senior Secured First Mortgage Bonds, Placed on Review for Upgrade, currently A2

....Underlying Senior Secured First Mortgage Bonds, Places on Review for Upgrade, currently A2

....Senior Secured Shelf, Placed on Review for Upgrade, currently (P)A2

Outlook Actions:

..Issuer: Connecticut Light and Power Company

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Yankee Gas Services Company

....Outlook, Remains Stable

Affirmations:

..Issuer: Yankee Gas Services Company

.... Issuer Rating, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed A2

RATINGS RATIONALE

"We think CL&P's recent rate case settlement is an indication that the Connecticut regulatory environment has become more credit supportive compared to our historical views" said Jeff Cassella, Vice President -- Senior Credit Officer.

The review for upgrade will consider the outcome of CL&P's recent rate case settlement approved by the PURA which is credit positive for not only CL&P, but all of the state's utilities. It is an indication that the Connecticut intervenors and regulatory staff are amenable to agreeing to terms involved in general rate case filings instead of having to fully litigate rate cases which has been the norm in this jurisdiction for many years.

The settlement benefits CL&P's earnings and cash flow by reducing regulatory lag, the interval between a utility's costs and investments and their recovery from customers through an increase in rates. Rate-case settlements usually result in a rate-case decision more quickly than typically lengthy fully litigated rate cases.

The settlement resulted in a $124.7 million phased-in base electric distribution revenue increase, including a $64.3 million increase on 1 May 2018, $31.1 million in May 2019 and $29.2 million in May 2020. The phased-in rate increase seeks to mitigate some of the immediate rate effect on customers. Although the agreement was less than half of CL&P's request of $336.9 million, the agreed revenue increase is partially affected by lower revenue collected from customers owing to the recent change in the corporate federal tax rate.

The agreement included a return on equity (ROE) of 9.25% and equity ratio of 53%. Although the ROE is lower than the national average of around 9.7%, it is higher than CL&P's ROE of 9.17% allowed in its previous 2014 rate-case decision. The utility must share 50% of any earnings above the 9.25% ROE with its customers. Additionally, CL&P will be able to earn a return on a higher equity ratio compared with the 50.38% allowed in its last rate case.

The settlement allows CL&P to continue to use a revenue decoupling mechanism that was adopted in its last rate case. Revenue decoupling is credit positive because it adds to the predictability and stability of revenue and cash flow generation. CL&P's decoupling mechanism reconciles the amounts recovered from customers, on an annual basis, with the distribution revenue requirement to be set by the PURA. The settlement also included a core capital tracker that will allow for timely recovery of the utility's capital investments for core capital projects of up to $270 million for calendar years 2018-20 and up to $300 million for each year after 2020 until its next rate case proceeding.

The affirmation of Yankee Gas Services Company's (YGS or Yankee Gas) Baa1 rating and stable rating outlook reflects the company's low-risk business profile as a regulated natural gas local distribution company (LDC) in a credit supportive Connecticut regulatory environment. The rating incorporates a view that the company's financial metrics will deteriorate in 2018, such that its ratio of cash flow pre-W/C to debt will decline to the low-to-mid-teens range, due primarily to recent changes associated with US tax reform and regulatory lag as it prepares to file a general rate case in 2018. However, Moody's expect CL&P's financial metrics to improve in 2019, such that its ratio of cash flow pre-W/C to debt returns to the mid-to-high teens.

The stable outlook for Yankee Gas incorporates the credit supportive Connecticut regulatory environment and the expectation that the outcome of CL&P's recent rate case bodes well for a potential settlement in Yankee Gas' upcoming rate case proceeding which the company said it would file by 15 June 2018. Furthermore, Moody's expects Yankee Gas will be able to request and implement revenue decoupling and infrastructure investment trackers coming out of its next rate case filing, which are utilized by other Connecticut regulated electric and gas utilities as mandated by the state's passage of Public Act 13-298 in 2013. The stable outlook incorporates our expectation that financial metrics will decline in 2018 due to the impacts from tax reform, but we expect Yankee Gas' financial performance will improve in 2019 such that its ratio of CFO pre-W/C to debt will be in the mid-to-high teens range.

Factors that Could Lead to an Upgrade

In light of the improved credit supportiveness in the Connecticut regulatory environment as evidenced by the recent rate case settlement, CL&P's rating could be upgraded if the company's financial performance will return to historical levels in 2019, after a decline in 2018 due to changes from tax reform. The review will focus on how quickly the company will be able to improve its financial metrics such that its ratio of CFO pre-W/C will approach 20% on a sustained basis.

Yankee Gas' rating could be upgraded if there is continued improvement in the credit supportiveness of the Connecticut regulatory framework, which is evidenced by a constructive outcome on its upcoming rate case filing including the adoption of revenue decoupling and certain capital investment trackers and an improvement in Yankee Gas' financial metrics in 2019, post the impact from tax reform, such that its ratio of CFO pre-W/C to debt approaches 20%.

Factors that Could Lead to a Downgrade

Given the review for upgrade, a downgrade of CL&P's rating is unlikely. However, the rating outlook could be changes to stable or negative if the company's financial metrics are not expected to improve on a sustained basis such that its ratio of CFO pre-W/C to debt is expected to remain below 16% or if we expect the credit supportiveness of the Connecticut regulatory environment not to be sustainable.

Yankee Gas' rating could be downgraded if there is deterioration in the credit supportiveness of the Connecticut regulatory environment such that its upcoming rate case proceeding is contentious and results in an outcome that is less credit supportive than expected including delays in recovery of its capital investments or if YGS' financial metrics do not improve in 2019, post the impact from tax reform, and remain weak for its rating such that its ratio of CFO pre-W/C to debt is sustained below 16%.

Headquartered in Berlin, CT, CL&P and Yankee Gas are the state's largest regulated electric transmission and distribution and natural gas distribution companies serving over 1.4 million customers combined. CL&P is the largest operating subsidiary of Eversource Energy (Baa1 stable) with total assets of about $11.1 billion as of 31 March 2018 while Yankee Gas has assets of about $2 billion. CL&P and Yankee Gas' other affiliated companies include regulated electric utilities NSTAR Electric Company (A2 stable), Public Service Company of New Hampshire (A3 stable), and NSTAR Gas (not rated), a natural gas distribution company in Massachusetts.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeffrey F. Cassella
Vice President - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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