S&P: UIL Holdings Corp. Upgraded To 'A-' From 'BBB+' On Implemented Insulation Measures; Outlook Stable
At the same time, we are raising our rating on UIL Holdings' senior unsecured debt to 'BBB+' from 'BBB' and raising the rating on United Illuminating's debt to 'A-' from 'BBB+'. In addition, we are raising our rating on Connecticut Natural Gas' senior unsecured debt to 'A-' from 'BBB+'. We have affirmed our 'A' rating on Southern Connecticut Gas' first mortgage bonds; the recovery rating on the bonds remains '1+'.
"The upgrade reflects our view that the insulation measures UIL Holdings has implemented, along with the company's 'a-' stand-alone credit profile, support one notch of separation from the credit profile of its ultimate parent, Iberdrola S. A.," said S&P Global Ratings credit analyst Dimitri Nikas.
The insulation measures include the following:The creation of a special-purpose entity (SPE) that owns the equity in UIL Holdings and which in turn is wholly owned by Iberdrola's U. S.-based operations, Avangrid Inc. The appointment of an independent director at the SPE and the creation of a golden share at the SPE both of whose votes are required to file the SPE or UIL Holdings into bankruptcy for the benefit of their parent. A nonconsolidation opinion at the SPE indicating that a bankruptcy court wouldn't consolidate the SPE's assets into those of its immediate parent, AVANGRID Inc. We also recognize that UIL Holdings' subsidiaries, United Illuminating Co. (United Illuminating), Southern Connecticut Gas Co. (SCG), and Connecticut Natural Gas Co. (CNG), have limitations on their dividends that help protect each entity's credit profile. None of the subsidiaries is allowed to make dividend distributions to UIL Holdings if doing so would lower the common equity level in their capital structure by more than 300 basis points below the level authorized by the utility regulator.
The stable outlook on UIL Holdings mirrors our outlook on Iberdrola and reflects our view that Iberdrola will maintain Standard & Poor's-adjusted FFO to debt of about 20% over the next two years. We base our forecast on Iberdrola's strategic plan for 2016–2020, which encompasses an ambitious investment plan and debt-level maintenance. Although we recognize the business model's resilience, we believe the group currently has little headroom at this new rating level. We expect headroom to increase somewhat after 2018, once the company commissions its large renewables projects.
We could lower our corporate credit rating on UIL Holdings if we lower the ratings on ultimate parent Iberdrola or if UIL Holdings' own credit profile weakens such that FFO to debt is consistently below 13%. We would lower the rating on Iberdrola if the company's cash flow and leverage measures weakened more than we currently expect, with FFO to debt at 20%. This could occur if Iberdrola engages in a large debt-financed acquisition, if weaker-than-expected power market fundamentals in the group's key markets weigh on its profitability, or from unexpected adverse regulation in one of Iberdrola's key markets that prevented it from improving its credit measures. We believe Iberdrola's earnings trajectory, and to some extent its credit measures, include some volatility from currency risks. Although debt is adequately spread by currency, a material change in the U. S. dollar or British pound conversion into euros could further reduce the group's flexibility within its rating.
We view an upgrade as unlikely under our base-case scenario. However, it could arise if Iberdrola's financial risk profile strengthens materially, more than we currently assume. We see sustainable adjusted FFO to debt above 23% as commensurate with a higher rating, accompanied by a continuous focus on regulated and long-term contracted activities. Moreover, given our base-case projections for UIL Holdings with FFO to debt of about 15% we do not anticipate raising the company's stand-alone credit profile over the next 12 to 24 months.