Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Eversource Energy to 'BBB' from 'BBB+'.
In addition, Eversource's Short-Term IDR is also downgraded to 'F3' from 'F2', as per Fitch's Short-Term Ratings Criteria. At the same time, the senior debt at Eversource is downgraded to 'BBB' from 'BBB+' and the CP is downgraded to 'F3' from 'F2'.
The Long-Term IDR of the utility subsidiary NSTAR Electric Company is also downgraded to 'A-' from 'A'. NSTAR Electric's Short-Term IDR is affirmed at 'F1'. At the same time the senior debt is downgraded to 'A' from 'A+', the preferred debt is downgraded to 'BBB+' from 'A-' and the CP is affirmed at 'F1'.
The Rating Outlook for each of the entities is Stable.
The ratings and Outlook of the other Fitch-rated subsidiaries are unaffected at this time.
Eversource's ratings downgrade reflects continuing uncertainty around the sale of the three offshore wind projects under development. Fitch expects the sales will be executed at a lower price than previously expected due to the escalation in development costs and the rejection of the increase in power price at Sunrise Wind. Eversource's credit profile has been weak over the last three years with FFO-leverage over 7.0x, as per Fitch's calculations. Sale proceeds was expected to be a key source of cash for parent level debt reduction, along with equity issuance. At this time, Fitch expects reduction in debt will be lower than expected resulting in leverage around 5.5x by 2025.
With greater pressures on the sale price, there is greater reliance on equity issuance for debt reduction. Failure to issue adequate equity may have additional negative rating consequences. The downgrade of Eversource's Short-Term IDR reflects Fitch's assessment of Eversource's financial structure, flexibility and operating environment, which results in the assignment of the lower of the two short-term options for the current long-term rating.
NSTAR Electric's IDR is downgraded based on Fitch's parent subsidiary linkage criteria which limits the difference between Eversource and any of its higher rated regulated subsidiaries to two notches.
Key Rating Drivers
Eversource Energy
Continued Pressure On Offshore Business Sale: The batch sale of Eversource's 50% interest in three offshore wind projects, which are under various stages of development, face ever increasing headwinds related to supply issues, increasing costs and power price adjustments. In Fitch's view, these pressures are likely to lower the realized sale price further from Fitch's previous expectations. Following the New York regulator's recent decision to not grant Sunrise Wind (one of the projects) a rate increase, it will be put up for bidding again. If the Eversource joint venture (JV) does not win the bid, which Fitch has assumed in its base case, the contract will be terminated resulting in sizeable breakage fees both for contract termination and for counterparty contracts, resulting in a lower overall sale price. Danish wind energy developer Orsted A/S (BBB+/Negative) owns the other 50% share in all three projects.
If Eversource wins the bid, it would be able to negotiate higher power prices more in line with the current market conditions. In this case, the overall sale price is likely to be higher, but so would business risk associated with the development and construction of the project. While a positive outcome in the Sunrise re-bid could result in incrementally improved credit metrics from our base case, Fitch does not consider the potential for improvement to be material.
Overall, the projects continue to experience higher supply chain and capital costs and greater inflation which will impact sale prices. A majority of the recently announced impairment totaling $1.4 billion to $1.6 billion is attributable to lack of vessel availability and the replacement of a key counterparty. Fitch believes, these pressures have not fully abated and continue to represent a risk to the overall returns on the offshore wind portfolio.
On-going Risks Remain: Fitch believes Eversource will likely retain some risk post-sale even though the company is not in a position to control development costs. In the current framework, the construction costs are not fully locked-up under a date-certain fixed price EPC contract covering the entire project. Additionally, in an uncertain industry environment, with a complex construction process, counterparty risks remain.
Based on provision in the Inflation Reduction Act of 2022, two projects will likely qualify for 10% additional Investment Tax Credit (ITC) adders according to a report from a legal and consulting firm engaged by the company. This represents a meaningful component to the sale price. In Fitch's view, there continues to be some uncertainty around the implementation of these provisions.
Weak Financial Profile: Eversource's financial profile is weak, even though it derives stable cash flows from its regulated utility subsidiaries. Leverage has been elevated in recent years due in part to the acquisition of utility companies, high capex and cost escalation in its offshore wind growth projects, resulting in leverage averaging over 7.0x over the last three years.
Deleveraging Reliant on Equity Issuance: With greater pressures on the sale price in an industry environment of continued headwinds, there is greater reliance on equity issuance, which will account for most of the deleveraging under Fitch's assumptions. The company has $1.0 billion authorized under an existing at-the-market program in addition to annual drip issuance of $150 million. However, at this time, Fitch expects the company will issue a significantly higher amount of equity over the next two years. Equity proceeds will be supplemented by the proceeds of the sale of the offshore business resulting in FFO leverage in the 5.5x area, which is consistent with other 'BBB' rated utility parent companies. Failure to issue adequate equity in a timely manner would result in a negative rating action.
Parent-Subsidiary Linkage: NSTAR Electric Company's Long-Term IDR was downgraded due to its parent-subsidiary linkage (PSL) with Eversource. There is a PSL between Eversource and its rated utility subsidiaries. Fitch determines Eversource's Standalone Credit Profile (SCP) based upon consolidated metrics. Fitch considers the utility subsidiaries to have stronger SCPs than Eversource. As a result, the linkage between Eversource and the utility subsidiaries is assessed following weak parent/strong subsidiary factors. Emphasis is placed on the subsidiaries' status as regulated entities. Legal ring-fencing is porous, given the general protections afforded by economic regulation, and access and control are also porous.
Eversource centrally manages the treasury function for all of its utility subsidiaries and is the sole source of equity; however, subsidiaries issue their own long-term debt. Due to the aforementioned assessment, Fitch will limit the difference between Eversource and any of its higher-rated regulated subsidiaries to two notches.
Large Utility Capex Plan: Eversource expects to spend $17.1 billion in capex for core businesses, predominantly regulated utilities, over 2024-2027. This utility capex is a relatively low-risk growth plan, including $7.0 billion in electric distribution, $4.2 billion in natural gas distribution, $4.1 billion in Federal Energy Regulatory Commission (FERC) regulated electric transmission and approximately $0.85 billion in water distribution. Most of Eversource's planned utility capex will be recovered with limited lag, reflecting FERC construction work in progress, electric distribution trackers and natural gas distribution infrastructure expansion cost-recovery mechanisms.
Regulatory Diversification: Eversource's three-state service territory provides regulatory diversification that is further enhanced by significant investments in electric transmission projects regulated by FERC. Fitch considers FERC to be among the most constructive regulatory bodies due to timely cost recovery and formulaic rates of return. FERC-regulated electric transmission operations account for more than one-third of Eversource's consolidated rate base; Connecticut and Massachusetts each account for a little less than one-third of the company's consolidated rate base, with New Hampshire accounting for the remainder.
Fitch considers the regulatory environment for electric utilities in Connecticut to be challenging. Recent actions by the Connecticut Public Utilities Regulatory Authority to implement performance-based regulation, enactment of Senate Bill 7 and authorized ROEs that are lower than the national average result in a meaningfully less constructive regulatory environment for electric utilities.
NSTAR Electric Company
Low-Risk Business Profile: NSTAR Electric's ratings largely reflect the low business risk and stable cash flows of its regulated electric transmission and distribution operations. The company has no commodity exposure and a decoupling mechanism that eliminates the effect of weather and usage patterns on revenue. A significant and growing share of the rate base is derived from electric transmission investments regulated by FERC.
Balanced Regulatory Environment: Fitch considers the regulatory environment overseen by the Massachusetts Department of Public Utilities (DPU) to be relatively balanced, supporting NSTAR Electric's strong financial profile. NSTAR Electric operates under a five-year performance-based ratemaking (PBR) plan that runs through Dec. 31, 2027.
NSTAR Electric benefits from full revenue decoupling and several cost-recovery mechanisms, which enhance the stability and predictability of cash flows. The DPU permits recovery outside of general rate cases for pension and post-retirement benefits, energy efficiency program costs and the associated lost revenue, and storm costs.
2022 Multiyear Rate Case Settlement: Fitch deems the outcome of NSTAR Electric's rate case to be constructive and supportive of credit quality. DPU authorized a $64.3 million increase based on a ROE of 9.8% with 53.21% equity capital and a five-year PBR plan commencing Jan. 1, 2023. Earnings over 10.8% are to be shared with ratepayers. The decision implements storm fund refinements and advanced metering infrastructure tariff and is in alignment with the state's electrification policy. NSTAR Electric had requested an $87.6 million increase in base rates at a ROE of 10.50% with 53.8% equity capital.
2017 Rate Case Decision: Fitch considers the outcome of NSTAR Electric's 2017 rate case and implementation of PBR to have been constructive. The DPU authorized NSTAR Electric's $4.8 million electric rate increase in December 2018. This rate increase consisted of a PBR adjustment increase of $31.9 million, offset by a distribution rate decrease of $27.1 million to account for the return of excess accumulated deferred income taxes to ratepayers as a result of federal tax law revisions. NSTAR Electric's fourth annual performance-based rate adjustment resulted in a $36.8 million increase to base distribution rates effective Jan. 1, 2022.
Large Capex Plan: Fitch expects capex to remain elevated through the forecast plan, due in large part to significant investments in FERC-regulated regional transmission projects. Management forecasts transmission capex to total approximately $2.3 billion over 2024-2027. Improvements to NSTAR Electric's distribution system also will contribute to the large capex plan in the near term. Fitch expects capex will be funded in a manner consistent with the existing capital structure.
Strong Financial Metrics: NSTAR Electric's financial profile is well positioned within its rating level. Fitch expects NSTAR Electric's FFO leverage to average around 3.9x-4.0x through 2026, which is strong for the rating. Ongoing investments in FERC-regulated transmission projects that receive timely cost recovery and above-average returns should enable the utility to maintain its financial strength.
Derivation Summary
Eversource compares adequately with other 'BBB' rated utility parent companies: Exelon Corp. (Exelon; BBB/Stable) and American Electric Power (AEP; BBB/Stable). Eversource derives all its cashflows from regulated operations as does Exelon, post-genco spin compared to approximately 90%-95% for AEP. Exelon is significantly larger than its peers. AEP has a more geographically diverse asset mix with operations in 11 state, compared to Eversource's three state jurisdictions and Exelon's six state jurisdictions.
Fitch expects Eversource to be more levered initially than its peers with FFO leverage of over 7.0x improving to around 5.5x by the end of the forecast period. Fitch currently expects both Exelon's and AEP's FFO leverage to average approximately 5.8x over the forecast period.
Exelon's parent level debt is expected to be approximately 27% over the forecast period, which is higher than AEP's parent level debt of 23%. Eversource's parent level debt is expected to be higher around 30%.
Key Assumptions
Terms of the sale of the offshore business finalized within 2Q24 with the entire proceeds applied towards debt reduction;
Clearly laid out plan for equity issuance as needed, in order to reach leverage targets;
No incremental liabilities post the sale of offshore business;
Consolidated rate base growing to $37.7 billion by YE 2027, from $24.4 billion at YE 2021;
Consolidated core business capex of $17.1 billion over 2024-2027;
O&M expense relatively flat;
South Fork Wind expected to be in service by the end of 1Q24;
Normal weather.
RATING SENSITIVITIES
Eversource Energy
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO leverage expected to remain less than 5.2x on a sustained basis;
Demonstrated mitigation of retained risk associated with offshore wind divestitures.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant delays in the completion of the sale of the offshore business; significantly weaker terms, including retained risk; lower net proceeds from the sale; or allocation of the proceeds toward uses other than debt reduction;
Failure to issue equity each year over the 2024-2025 timeframe to support deleveraging;
Sustained FFO leverage exceeding 6.0x, after the divestiture of the offshore wind assets;
Adverse regulatory actions or other events that result in downgrades to Eversource's utility subsidiaries.
NSTAR Electric Company
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade to parent Eversource's Long-Term IDR; NSTAR Electric's ratings upside is restricted by a maximum two-notch differential between the Long-Term IDRs of NSTAR Electric and Eversource;
FFO leverage expected to remain below 4.0x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade to parent Eversource's Long-Term IDR, given Fitch's maximum allowed two-notch differential between the Long-Term IDRs of the entities;
FFO leverage expected to exceed 4.5x on a sustained basis.
Liquidity and Debt Structure
Adequate Liquidity: Fitch considers liquidity for Eversource and each of its regulated utility subsidiaries to be adequate. Eversource has a $2.0 billion CP program that the company uses to provide its subsidiaries with intercompany loans. Eversource had $1.3 billion of CP borrowings outstanding at Sept.30, 2023, leaving $679.7 million of available borrowing capacity. Eversource, CL&P, PSNH, NSTAR Gas, Yankee Gas Services Company (not rated), Eversource Gas Company of Massachusetts (EGMA; not rated) and Aquarion Water Company of Connecticut (not rated) participate in a joint $2.0 billion revolving credit facility (RCF) that terminates on Oct. 13, 2028. Under the RCF, CL&P has a $600 million borrowing sublimit; PSNH, NSTAR Gas, EGMA and Yankee Gas each have a $300 million sublimit; and Aquarion Water Company of Connecticut has a $100 million sublimit. The RCF serves to backstop Eversource's CP program. There were no RCF borrowings outstanding as of Sept.30, 2023. NSTAR Electric maintains its own $650 million CP program backstopped by an equal-sized RCF. NSTAR Electric's $650 million RCF is separate from the shared RCF of parent Eversource and the other utilities but also terminates on Oct. 13, 2028. As of Sept. 30, 2023, there was $209.5 million outstanding, leaving $440.5 million of available borrowing capacity. Eversource and its utility subsidiaries require modest cash on hand and had $78.8million of unrestricted cash as of Sept. 30, 2023.
Manageable Debt Maturities: Long-term debt maturities over the next five years are manageable. At the parent level, maturities are $900 million of 4.20% senior unsecured notes due June 27, 2024; $450 million of 2.9% senior unsecured notes due Oct. 1,2024; $300 million of 3.15% senior unsecured notes due Jan. 15, 2025; $300 million of 0.8% senior unsecured notes due Aug. 15, 2025; $250 million of 3.35% senior unsecured notes due March 15, 2026; $450 million of 4.75% senior unsecured notes due May 15, 2026; $300 million of 1.4% senior unsecured notes due Aug. 15, 2026; $650 million of 2.90% senior unsecured notes due March 1, 2027; $600 million of 4.60% senior unsecured notes due July 1, 2027; $450 million of 3.3% senior unsecured notes due Jan. 15, 2028;and $1.3 billion of 5.45% senior unsecured notes due March 1, 2028.
Issuer Profile
Eversource is a holding company that owns seven regulated utilities serving electric T&D, natural gas distribution and water distribution customers in Massachusetts, Connecticut and New Hampshire.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
EVERSOURCE ENERGY 
