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    Fitch Rates New England Power Company's Senior Notes 'A-'


    November 22, 2022 - ENP Newswire

     

      Fitch Ratings has assigned an 'A-' rating to New England Power Company's (NEP) issuance of $300 million 30-year senior unsecured notes.

      The notes rank pari passu with NEP's other existing senior unsecured debt. Net proceeds from the issuance will be used for general corporate purposes. NEP's Long-Term Issuer Default Rating (IDR) is 'BBB+'/Outlook Stable. NEP is a wholly owned indirect subsidiary of National Grid plc (NG; BBB-/Stable).

      Key Rating Drivers

      Constructive Regulatory Environment: The vast majority of NEP's revenues are derived from rates set by Federal Energy Regulatory Commission (FERC) under a tariff that provides timely recovery of capital and operating costs, as well as a stable earnings and cash flow profile. The rates are adjusted annually to reflect actual operating costs, forward-looking capital additions and a true-up, which combine to reduce regulatory lag.

      NEP's rates are set on a base ROE of 10.57% with incentive adders capped at 11.74% and the use of the company's actual capital structure, which was 62.7% for the calendar year ended Dec. 31, 2021. The company's achieved ROE for fiscal year ended March 31, 2022 of 10.9% is consistent with prior years' results. There are longstanding challenges to NEP's and other New England transmission owners' rates that remain unresolved. A recent court ruling in an unrelated FERC ROE case has continued the uncertainty for FERC's ROE setting process. Fitch does not expect a near-term resolution to the challenge to NEP's rates, with a resolution possibly extending beyond the current rating horizon.

      Revenues Not Volume Dependent: As a FERC-regulated transmission entity, NEP's revenue is not volume dependent. Under the FERC tariff structure, revenues are forward-looking and based on the tariff-specified rate of return parameters. Any variations are trued-up in the subsequent annual filing. NEP's counterparty risk is with the ISO New England, Inc. (ISO-NE), which is the regional transmission operator for the region, not the utilities, which in turn collect the funds from the end customers.

      Escalating Capex: NEP capex is expected to continue to increase over the forecast period given the need for increased reliability, increasing electrification, and need to integrate renewable resources to meet the region's environmental goals. Fitch expects capex to average around $430 million annually over the next four years compared to $230 million average in the prior three years. Spending is mainly dictated by ISO-NE's planning and interconnection process, which is responsible for operating and planning a reliable transmission system and promoting efficient wholesale markets. As such, Fitch considers there to be minimal risk in NEP's elevated capex.

      Strong Credit Metrics: NEP's credit metrics are strong for its rating as a result of its robust capital structure and high ROE. Fitch expects NEP's FFO leverage to be in the range of 3.5x-4.0x. While NEP's credit metrics are stronger than a 'BBB+' rating, Fitch has constrained NEP's rating due to parent subsidiary linkage considerations.

      Parent and Subsidiary Rating Linkage: There is parent subsidiary linkage between NG and NEP. Fitch determines NG's standalone credit profile (SCP) based upon consolidated metrics. Fitch considers NEP to have a SCP stronger than NG. As such, Fitch has followed the stronger subsidiary path. Emphasis is placed on NEP's status as a FERC regulated entity. Legal ring fencing is considered porous given the general protections afforded by economic regulation. Access and control are evaluated as porous. NG centrally manages the treasury function for all of its entities, including NEP, and is the sole source of equity; however, NEP issues its own long-term debt. Due to the aforementioned linkage considerations, Fitch limits the difference between NG and NEP to two notches.

      Derivation Summary

      NEP's credit profile is strong for its 'BBB+' IDR due to a robust capital structure and high ROE. FFO leverage for the LTM ended March 31, 2022 was 4.0x, and is expected to remain well below its 5.3x downgrade threshold over the forecast period. Fitch constrains NEP's rating due to parent subsidiary linkage considerations, with lower rated parent, NG. NEP is stronger than AEP Transco (A-/Stable). AEP Transco's FFO leverage for the LTM ended March 31, 2022 was 4.4x, and is expected to remain well below its 4.8x downgrade threshold over the forecast period.

      Similar to NEP, Fitch considers AEP Transco's ratings to be constrained by its ownership by a parent (American Electric Power Company; BBB/Stable) with an IDR that is two notches lower. NEP is smaller and less geographically diverse than AEP Transco. NEP's rate base of $2.26 billion for the 2021/2022 rate year is significantly smaller than AEP Transco's rate base of approximately $8.4 billion as of Dec. 31, 2021. NEP operates only in ISO-NE, whereas AEP Transco operates in PJM Interconnection and Southwest Power Pool.

      Key Assumptions

      Capex averaging $430 million annually;

      All projects subject to FERC's formula rate plan;

      Current FERC formula rates remain in effect;

      Capital allocation decisions consistent with use of NEP's actual capital structure under the FERC approved formula rate.

      RATING SENSITIVITIES

      Factors that could, individually or collectively, lead to positive rating action/upgrade:

      A positive rating action is not likely at this time, as NEP's ratings are constrained by NG's current rating, which is two notches lower.

      Factors that could, individually or collectively, lead to negative rating action/downgrade:

      FFO leverage above 5.3x for a sustained period;

      Significant adverse changes to the regulatory framework;

      A downgrade of one notch or more at NG would also likely trigger a downgrade of NEP under Fitch's parent and subsidiary linkage criteria.

      Best/Worst Case Rating Scenario

      International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579">https://www.fitchratings....

      Liquidity and Debt Structure

      Adequate Liquidity: To meet short-term liquidity requirements, NEP participates in a regulated money pool managed by National Grid USA (NGUSA), an indirect subsidiary of NG. NGUSA has the ability to borrow up to $3.0 billion from NG for working capital needs, including funding of the regulated money pool if required. NGUSA has access to committed revolving credit facilities as well as U.S. and Euro CP programs. NEP can borrow and lend funds, but NGUSA can only lend into the money pool. At fiscal year-end March 31, 2022, NEP was in a net lending position to the money pool. NEP has a manageable debt maturity schedule. NEP's next corporate debt maturity is 2047.

      Issuer Profile

      NEP owns and operates electric transmission assets located in Massachusetts, New Hampshire and Vermont. NEP is a wholly owned indirect subsidiary of NG.

      Summary of Financial Adjustments

      No financial statement adjustments were made that depart materially from those contained in the published financial statements of the relevant rated entities.

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