April 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded NV Energy, Inc.’s (NVE) Long-term Issuer Default Rating (IDR) to ‘BB+’ from ‘BB’. Fitch has also upgraded the Long-term IDRs of NVE’s utility operating subsidiaries Nevada Power Company d/b/a/ NV Energy (NPC) and Sierra Pacific Power Company d/b/a/ NV Energy (SPPC) to ‘BBB-‘ from ‘BB+’. Fitch has also assigned a short-term IDR of ‘F3’ to NPC and SPPC. Finally, Fitch has upgraded to ‘BBB’ and withdrawn NPC’s senior unsecured debt rating. A full list of rating actions follows at the end of this release. The Rating Outlook for NVE, NPC and SPPC is revised to Stable from Positive. Approximately $5 billion of debt is affected by the rating actions.
—Improving financial profile due to significant debt reduction, higher earnings and lower interest expense;
—Relatively low 2013 - 2015 cap-ex requirements following completion of a major generation build cycle;
—A balanced regulatory environment in Nevada;
—Relatively high debt leverage notwithstanding significant reductions in recent years;
—Continued, albeit sluggish, economic recovery in Nevada
Upgrade and Stable Outlook
The ratings and Stable Rating Outlooks reflect improved consolidated credit metrics due to historic and anticipated debt reduction, a balanced regulatory environment in Nevada and slowly improving regional economic conditions. The ratings consider NVE management’s ongoing efforts to continue to work effectively with regulators to reduce regulatory lag and improve credit quality and earned returns. The Public Utility Commission of Nevada (PUCN) has approved several rate riders designed to recover certain variable costs outside of base rate proceedings and general rate case decisions in recent years have been supportive of credit quality, in Fitch’s opinion.
Improved Financial Profile
In 2012, NVE’s credit metrics improved meaningfully, primarily reflecting the $159 million rate increase authorized by the PUCN in NPC’s last general rate case (GRC) effective Jan. 1, 2012. EBITDA-to-interest and debt-to-EBITDA of 3.8x and 4.4x, respectively, in 2012 are consistent with today’s ratings upgrade.
Fitch projects that NVE’s EBITDA coverage and debt ratios will improve to 4x or better during 2013 - 2015. Similarly, 2012 FFO coverage and leverage ratios of 3.9x and 17.4% are expected to strengthen modestly to 4.1x and 19% during 2013 - 2015, supporting today’s rating actions and Stable Rating Outlook.
Capex and FCF
NVE’s capex peaked in 2008 due to a multi-year effort to build/acquire generating capacity to lessen NVE’s reliance on purchase power. With this period of elevated capital investment behind the company, projected capex during 2013 - 2015 is expected to average less than $500 million per annum. On a cumulative basis, NVE is expected to spend less during 2013 - 2015 than its peak 2008 investment tally of $1.6 billion. Fitch expects the decline in growth-related capital expenditures combined with a sharp increase operating earnings to result in significant excess cash generation during 2013 - 2015. Based on current assumptions, Fitch expects further debt reduction through 2015.
Growth capital at NVE is expected to be limited, in Fitch’s opinion, to completion of its smart grid investment, ON Line and other, relatively small transmission projects. Management intends to utilize internal cash to reduce debt while returning capital to shareholders through increased dividends, targeting a 60% - 65% payout ratio. Based on its current annual payout of $0.76 per share and the $1.30 per share mid-point of management’s current earnings per share guidance, NVE’s payout ratio is 59%.
NVE earnings, cash flow and coverage ratios benefit from the $159 million (7%) rate increase approved by the PUCN in NPC’s 2011 GRC. NPC filed the GRC in June 2011 and the PUCN issued its final decision December 2011. The rate increase represents more than 60% of NVE’s requested $250 million rate hike and was effective January 1, 2012. The PUCN rate increase was based on a 10.0% authorized return on equity (ROE), 50-basis points below the ROE adopted in NVE’s previous GRC.
While the 50-basis point decrease in authorized ROE in its 2011 GRC is a concern, the overall rate increase in the commission’s final decision was, in Fitch’s view, supportive of NVE/NPC credit quality. Fitch expects the regulatory compact in Nevada to continue to be supportive of NPC and its operating utilities current credit quality. Fitch expects NVE’s need for large base rate increases to diminish in light of our expectations for meaningfully lower 2013 - 2015 capital expenditures.
Under Nevada regulation, utilities file triennial GRCs and final decisions are required seven months following filing dates. Utilities are able to update GRC filings for known and measurable items. Other credit supportive aspects of Nevada regulation include pre-approval of planned capex and PUCN authorized deferred accounting and pass-through mechanisms for timely recovery of fuel and purchase power and demand side management expenses as well as lost sales due to energy efficiency programs.
SPPC submitted Notices of Intent (NOI) April 3, 2013 with the PUCN to file electric and gas rate adjustments by June 3, 2013 for rates to be effective January 1, 2014. Under Nevada state law, utilities are required to provide 60 day notice prior to filing a GRC.
Nevada Economic Conditions
Fitch’s projections consider the relatively sluggish recovery underway in Nevada. The state was hit particularly hard by the collapse of the housing market and broader recession that began in 2007. The high unemployment rate and general economic malaise in Nevada have constrained power demand and financial improvement at NVE and its utilities, in Fitch’s opinion. Retail kilowatt-hour sales turned positive in 2012 for NPC/SPPC and continued modest growth is projected during 2013 - 2015 at rates well-below those experienced prior to the great recession.
One Company Merger Initiative:
NPC plans to merge NPC and SPPC following completion of the ON Line transmission project (ON Line). The 235 mile 500 kv transmission project will connect NV’s southern service territory (NPC) with its northern service territory (SPPC) enabling more efficient joint dispatch and providing access to California markets. NVE will have a 25% ownership interest in the project, which is expected to be completed by December 31, 2013. Management has indicated that it plans to file its merger application with regulators six months prior to completion of ON Line. Regulatory approval is required from the PUCN and FERC to complete the anticipated merger. In Fitch’s view, the merger of NPC and SPPC is not likely to have an impact on NVE, NPC or SPPC’s credit ratings.
Fitch considers NVE’s liquidity position to be adequate. NPC and SPPC have sufficient availability under their respective $500 million and $250 million revolving credit facilities. These five-year facilities mature March 2017. Availability under the facilities is reduced by negative mark-to-market exposure of hedging obligations of up to $250 million for NPC and $125 million for SPPC. Under the direction of the PUCN, neither utility has entered into fixed-price natural gas hedges since 2009. At year-end 2012, neither utility had any negative mark-to-market exposure for hedging transactions. The facilities contain one financial maintenance covenant requiring both NPC and SPPC’s debt-to-capital ratio not to exceed 68%.
Ample availability under the credit facilities and a historical track record of accessibility to the capital markets, combined with moderate capex needs, should facilitate sufficient financial flexibility to NVE and its utility subsidiaries, in Fitch’s opinion.
An adverse change to the regulatory compact in Nevada could trigger future negative rating actions.
Greater than anticipated debt reduction and/or a faster-than-expected economic recovery in Nevada could result in positive rating actions.
Fitch has taken the following rating actions:
—Long-term IDR upgraded to ‘BB+’ from ‘BB’;
—Senior unsecured debt upgraded to ‘BB+’ from ‘BB’.
—Long-term IDR upgraded to ‘BBB-‘ from ‘BB+’;
—Senior secured debt upgraded to ‘BBB+’ from ‘BBB’;
—Senior unsecured debt upgraded to ‘BBB’ from ‘BB+’ and withdrawn
—Short-term IDR rated ‘F3’.
—Long-term IDR upgraded to ‘BBB-‘ from ‘BB+’;
—Senior secured debt upgraded to ‘BBB+’ from ‘BBB’
—Short-term IDR rated ‘F3’.
The Rating Outlook is revised to Stable from Positive.