NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' Long-Term Issuer Default Rating (IDR) to The Berkshire Gas Company (BGC) and Connecticut Natural Gas Corporation (CNG) and a 'BBB+' Long-Term IDR to The Southern Connecticut Gas Company (SCG) and The United Illuminating Company (UI). Fitch has assigned ratings to each entity's securities, as shown at the end of this release. BGC, CNG, SCG, and UI are regulated utility subsidiaries of AVANGRID, Inc. (AVANGRID; 'BBB+'/Stable).
The Rating Outlook is Stable for BGC, CNG, SCG, and UI.
Fitch has also assigned an 'F2' commercial paper (CP) rating to AVANGRID.
KEY RATING DRIVERS
Low-to-Moderate Business Risk
AVANGRID's
ratings largely reflect the relatively stable earnings and cash flows of
its eight regulated utilities that provide electric transmission and
distribution (T&D) and natural gas distribution service in areas of New
York, Connecticut, Maine, and Massachusetts. The company's regulated
utilities are low-risk businesses that account for greater than 70% of
consolidated EBITDA.
Ratings also reflect AVANGRID's renewable energy business, which Fitch considers to have a higher risk profile than the regulated utilities. Renewables owns an aggregate of more than 6,300 megawatts of wind, solar, and thermal installed capacity, of which 89% is from onshore wind facilities. Roughly two-thirds of capacity and nearly three-quarters of 2015 generation production had long-term power purchase off-take agreements, mitigating some of the risk involved in this business.
Strong Financial Metrics
AVANGRID's financial profile is strong,
benefiting from a conservative capital structure and robust cash flows.
Fitch expects adjusted debt/EBITDAR to average around 2.5x-2.8x through
2018, with funds from operations (FFO) fixed-charge coverage averaging
around 6x and FFO adjusted leverage averaging around 2.6x-2.9x.
Parent-Subsidiary Rating Linkage
There is a moderate-to-strong
linkage between the ratings of AVANGRID and its parent, Iberdrola S.A.
(Iberdrola; 'BBB+'/Stable). However, AVANGRID is publicly traded, has
independent treasury functions, its own access to the equity market, and
a separate management team. At AVANGRID's current rating level, Fitch
would consider a maximum one-notch differential between the Long-Term
IDRs of AVANGRID and Iberdrola.
Supportive Regulatory Ring-Fencing Measures
The Long-Term IDRs of
AVANGRID's utility subsidiaries consider regulatory ring-fencing
measures that are in place. At each utility these measures include a
minimum equity ratio requirement, commitments to maintain separate books
and records, and a prohibition on commingling of funds. These provisions
enhance the utilities' credit profiles by adding a layer of protection
from AVANGRID, its nonregulated renewable energy business, and ultimate
parent Iberdrola.
Rate Freezes
As a part of the approval process for AVANGRID's
acquisition of UIL Holdings Corporation (UIL), rate freezes were
implemented at UIL's utilities. BGC's distribution rates are frozen
until June 1, 2018, and management currently anticipates that a base
rate case would likely be filed in 2017, based on a calendar year 2016
test year, for rates to be effective June 1, 2018.
CNG and SCG have their distribution rates frozen until Jan. 1, 2018. Costs associated with the replacement of cast iron and bare steel pipe and for system expansion to underserved areas are recovered through cost recovery mechanisms outside of general rate case proceedings, mitigating the impact of the rate freeze on credit metrics.
UI's distribution rates are frozen until Jan. 1, 2017; the utility's financial profile is not expected to be significantly affected due to the relatively short duration of the rate freeze.
BGC
Low-Risk Business Profile
The ratings of BGC primarily
reflect the low-risk business profile and stable cash flows of the
utility's regulated natural gas distribution operations. BGC has no
commodity exposure and uses weather insurance contracts to minimize the
negative impact associated with abnormally mild winter weather.
Robust Financial Metrics
BGC's financial metrics are very strong,
reflecting management's conservative capitalization structure of
approximately 30/70 debt/equity. Fitch expects adjusted debt/EBITDAR to
average around 2.5x through 2018, with FFO fixed-charge coverage
averaging around 5x and FFO adjusted leverage averaging around 2.6x-2.9x.
Balanced Regulatory Environment
Fitch considers the regulatory
environment overseen by the Massachusetts Department of Public Utilities
(DPU) to be relatively balanced, supporting BGC's stable financial
profile. BGC's last rate plan expired in 2012, and the utility continues
to operate under a 10.5% authorized return on equity (ROE). BGC has a
purchased gas cost adjustment clause with semi-annual resets and a
mechanism that recovers losses due to energy efficiency programs. Per
Massachusetts law, full revenue decoupling will be implemented as part
of BGC's next rate case, which will likely provide further stability and
predictability to earnings and cash flows.
CNG
Low-Risk Business Profile
The ratings of CNG primarily
reflect the low-risk business profile and stable cash flows of the
utility's regulated natural gas distribution operations. CNG has no
commodity exposure and benefits from full revenue decoupling, which
eliminates the impact of weather and usage patterns on its natural gas
revenues.
Robust Financial Metrics
CNG's financial metrics are very strong,
reflecting management's conservative capitalization structure of
approximately 30/70 debt/equity. Fitch expects adjusted debt/EBITDAR to
average around 2.2x-2.5x through 2018, with FFO fixed-charge coverage
averaging around 6x-6.5x and FFO adjusted leverage averaging around 2.5x.
Relatively Balanced Regulatory Compact
Fitch considers the
regulatory compact overseen by the Connecticut Public Utilities
Regulatory Authority (PURA) to be relatively balanced for natural gas
distribution utilities. The PURA allows for some beneficial ratemaking
features such as revenue decoupling, a purchased gas adjustment clause
with monthly resets, and ratemaking mechanisms that reconcile actual
revenue requirements related to cast iron and bare steel replacement and
system expansion. However, CNG's 9.18% authorized ROE is below average
and earnings sharing mechanisms reduce the upside from cost savings
plans.
SCG
Low-Risk Business Profile
The ratings of SCG primarily
reflect the low-risk business profile and stable cash flows of the
utility's regulated natural gas distribution operations. SCG has no
commodity exposure and uses weather insurance contracts to minimize the
negative impact associated with abnormally mild winter weather.
Solid Financial Metrics
SCG's financial metrics are solid,
reflecting management's conservative capitalization structure of
approximately 40/60 debt/equity. Fitch expects adjusted debt/EBITDAR to
average around 3.1x-3.4x through 2018, with FFO fixed-charge coverage
averaging around 5.2x-5.5x and FFO adjusted leverage averaging around
3.2x-3.5x.
Relatively Balanced Regulatory Compact
Fitch considers the
regulatory compact overseen by the PURA to be relatively balanced for
natural gas distribution utilities. SCG benefits from a purchased gas
adjustment clause with monthly resets, which insulates the utility from
exposure to commodity price volatility. However, SCG's 9.36% authorized
ROE is below average, and earnings sharing mechanisms reduce the upside
from cost savings plans.
Per Connecticut law, full revenue decoupling will be implemented as part of SCG's next rate case, which will likely provide further stability and predictability to earnings and cash flows.
UI
Low-Risk Business Profile
The ratings of UI primarily
reflect the low-risk business profile and stable cash flow of the
utility's regulated electric T&D operations. UI has no commodity
exposure and benefits from full revenue decoupling, which eliminates the
impact of weather and usage patterns on its electric revenues.
Somewhat Challenging Regulatory Compact
Fitch considers the
regulatory compact for UI's distribution assets to be somewhat
challenging. The PURA allows full revenue decoupling, but its authorized
ROEs for electric utilities are well below average. An earnings sharing
mechanism requires UI to share with customers on a 50/50 basis all
distribution earnings above its low 9.15% authorized ROE.
FERC-Regulated Transmission Assets
UI has a significant amount of
transmission assets that are regulated by the Federal Energy Regulatory
Commission (FERC). Fitch considers FERC regulation to be among the most
constructive due to the above-average ROEs, formula rates, and timely
return of invested capital.
Moderately Supportive Financial Metrics
UI's financial metrics are
moderately supportive of ratings. The capitalization structure is
balanced at approximately 50/50 debt/equity. Fitch expects adjusted
debt/EBITDAR to average around 3.7x-4x through 2018, with FFO
fixed-charge coverage averaging around 5x and FFO adjusted leverage
averaging around 3.7x-4x.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for
AVANGRID include:
--Rate base growth of $3.4 billion from 2014 to
2020;
--Total capex of $9.6 billion over 2016-2020, with $6.7
billion of that at the regulated utilities and $2.8 billion at the
renewable energy business;
--EBITDA compound annual growth rate
(CAGR; 2014-2020) of 5%-7%;
--Net income CAGR (2014-2020) of 8%-10%;
--Dividend
payout ratio of 65%-75%.
RATING SENSITIVITIES
BGC
Positive Rating Action: Due to BGC's
small scale of operations, a rating upgrade is not likely to occur.
Negative Rating Action: A rating downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.25x on a sustained basis. An adverse regulatory decision that meaningfully reduces the stability and predictability of earnings and cash flow could also result in a negative rating action.
CNG
Positive Rating Action: A rating upgrade could occur if
adjusted debt/EBITDAR were expected to decrease to less than 2x and FFO
fixed-charge coverage were expected to exceed 7.5x on a sustained basis.
Negative Rating Action: A rating downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.25x on a sustained basis. An adverse regulatory decision that meaningfully reduces the stability and predictability of earnings and cash flow could also result in a negative rating action.
SCG
Positive Rating Action: A rating upgrade could occur if
adjusted debt/EBITDAR were expected to decrease to less than 3x and FFO
fixed-charge coverage were expected to exceed 6x on a sustained basis.
Negative Rating Action: A rating downgrade could occur if adjusted debt/EBITDAR were expected to exceed 4x on a sustained basis. An adverse regulatory decision that meaningfully reduces the stability and predictability of earnings and cash flow could also result in a negative rating action.
UI
Positive Rating Action: A rating upgrade could occur if adjusted
debt/EBITDAR were expected to decrease to less than 3.25x and FFO
fixed-charge coverage were expected to exceed 6x on a sustained basis.
Negative Rating Action: A rating downgrade could occur if adjusted debt/EBITDAR were expected to exceed 4x and FFO fixed-charge coverage were expected to decrease below 4.5x on a sustained basis. An adverse regulatory decision that meaningfully reduces the stability and predictability of earnings and cash flow could also result in a negative rating action.
LIQUIDITY
Fitch considers the liquidity for AVANGRID and each of
its regulated utility subsidiaries to be adequate.
AVANGRID's liquidity is primarily supported by the company's $1.5 billion revolving credit facility, which matures on April 5, 2021. AVANGRID jointly shares this credit facility with the company's regulated utility subsidiaries BGC, CNG, SCG, UI, Central Maine Power Company (CMP; 'BBB+'/Stable), New York State Electric & Gas Corporation (NYSEG; 'BBB+'/Stable), and Rochester Gas and Electric Corporation (RGE; 'BBB+'/Stable).
The credit facility supports AVANGRID's $1 billion CP program, which AVANGRID uses to provide its subsidiaries with intercompany loans. The credit facility contains maximum sublimits of $1 billion for AVANGRID at the parent level, $250 million for each of CMP, NYSEG, RGE, and UI, $150 million for each of CNG and SCG, and $25 million for BGC.
AVANGRID's regulated utilities require modest amounts of cash on hand to fund their operations. AVANGRID had $403 million of unrestricted cash as of March 31, 2016, more than sufficient to cover its near-term cash funding needs.
Upcoming long-term debt maturities are manageable:
--CMP has $150
million maturing in 2019;
--NYSEG has $100 million maturing in 2016
and $200 million maturing in 2017;
--RGE has $40 million maturing
in 2016 and $150 million maturing in 2019;
--BGC has $1.5 million
maturing each year over 2016-2018 and $11.5 million maturing in 2019;
--CNG
has $10 million maturing in 2016 and $20 million maturing in 2017;
--SCG
has $50 million maturing in 2018;
--UI has $70 million maturing in
2017, $100 million maturing in 2018, and $31 million maturing in 2019.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings, with a Stable Outlook on each entity's Long-Term IDR:
The Berkshire Gas Company
--Long-Term IDR 'A-';
--Senior
secured debt 'A+';
--Senior unsecured debt 'A'.
Connecticut Natural Gas Corporation
--Long-Term IDR 'A-';
--Senior
unsecured debt 'A';
--Preferred stock 'BBB+'.
The Southern Connecticut Gas Company
--Long-Term IDR 'BBB+';
--Senior
secured debt 'A'.
The United Illuminating Company
--Long-Term IDR 'BBB+';
--Senior
unsecured debt 'A-';
--Pollution Control Revenue Refunding Bonds
'A-'.
Fitch has assigned the following rating:
AVANGRID, Inc.
--Commercial Paper 'F2'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including
Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery
Ratings and Notching Criteria for Utilities (pub. 04 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878227
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005206
Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005206
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.