The Negative Outlook reflects the expected deterioration in CHG&E's leverage metrics primarily driven by projected capital spending that is greater than Fitch's prior expectations and will require incremental debt financing. Fitch's main concern is the regulatory lag given the two-year rate freeze that is in place through
KEY RATING DRIVERS
Rising Capex: Management plans to spend approximately
Upcoming Rate Case Proceeding:
Management plans on filing a rate case in mid-2014 with new rates to be effective mid-2015. As per the terms of the Fortis merger approval, CHG&E is in the second year of a two-year distribution rate freeze that expires
Fitch's financial projections reflect a multi-year rate plan for CHG&E with an authorized ROE of 9.25%, which is in line with ROEs most recently granted to other
Weakening Credit Metrics: Credit measures are currently sound, but are expected by Fitch to weaken for the remainder of 2014 and beyond due to the base rate freeze and incremental debt financings to fund the growing capex. As expected, cash flow is also adversely affected by the expiration of bonus depreciation and other tax credits. Fitch estimates FFO-lease adjusted leverage to average above 4x and debt/EBITDAR near 3.8x over the five-year forecast period.
Ownership by Fortis: CHG&E operates as a stand-alone entity under Fortis ownership. Fitch believes Fortis' ownership provides CHG&E with some financial flexibility with respect to parent equity infusions or upstream dividends. Favorably, Fitch expects CHG&E's upstream dividend distributions to be minimal over 2015-2017 at the peak of capital spending.
Low-Risk Business Model: CHG&E operates a low-risk transmission and distribution regulated utility business, which bears no commodity price risk. The
Adequate Liquidity: The company has access to a total capacity of
Stable Outlook: Future developments that may, individually or collectively, lead to a Stable Outlook include:
--A constructive multi-year rate order that provides regulatory predictability and allows CHG&E to recover capex on a timely basis while mitigating the impact of PBAs on rates;
--Parental support by Fortis in the form of downstream equity infusions that results in lower projected leverage at CHG&E;
--If FFO lease-adjusted leverage maintains in a range between 3.75x-4.25x and adjusted debt/EBITDAR between 3.25x and 3.75x on a sustained basis.
Future developments that may, individually or collectively, lead to a negative rating action include:
-An unfavorable decision in CHG&E's pending rate case that precludes full and timely recovery of invested capital and other operating costs;
--FFO-lease adjusted leverage greater than 4.25x and adjusted debt/EBITDAR greater than 3.75x on a sustained basis;
-A deterioration of the
Fitch has affirmed the following ratings and revised the Rating Outlook to Negative from Stable:
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A';
--Short-term debt at 'F2'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--'Rating U.S. Utilities, Power and Gas Companies' (
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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