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
