Fitch Upgrades AVANGRID and Subs; Outlook Stable
The Rating Outlook is Stable for AVANGRID, CMP, NYSEG, and RGE.
The rating actions reflect a combination of factors, including the exchange of 18.5% of AVANGRID's common shares with those of UIL Holdings Corporation (UIL), reducing ultimate parent Iberdrola, S.A.'s (Iberdrola; 'BBB+'/Outlook Stable) ownership stake to 81.5% and resulting in AVANGRID's public listing on the New York Stock Exchange (NYSE). The rating actions also reflect the strong financial profiles for AVANGRID, CMP, NYSEG, and RGE and the completion of the UIL acquisition.
The share exchange and public listing of AVANGRID altered Fitch's view of the company's leverage. Previously, Fitch allocated some of Iberdrola's parent-level debt to Avangrid Renewables, LLC (Renewables), the company's renewable energy business, resulting in weaker leverage metrics at AVANGRID. However, AVANGRID's public listing and establishment of a common dividend policy that is consistent with other parent holding companies gives transparency to upstream distributions. Therefore, Fitch no longer allocates any parent level debt to Renewables and now views AVANGRID's leverage metrics as being materially stronger.
In addition, the UIL acquisition significantly increased the percentage of consolidated EBITDA derived from regulated utilities, with that figure increasing to greater than 70% from less than 60%. The remainder of EBITDA is derived from the renewable energy portfolio, which is largely hedged through long-term power purchase agreements. The acquisition also was conservatively financed with cash and equity from the share exchange and no incremental debt.
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 large and geographically diverse 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 was under long-term contract, mitigating some of the risk involved in this business. Additional investments in renewable energy projects are expected to have long-term power purchase off-take agreements, which over time should gradually increase the percentage of generation under long-term contract.
Strong Financial Metrics
AVANGRID's financial profile is strong, benefiting from a conservative capital structure and robust cash flow. Fitch expects adjusted debt/EBITDAR to average around 2.5x-2.75x through 2018, with funds from operations (FFO) fixed-charge coverage averaging around 6.0x and FFO adjusted leverage averaging around 2.75x.
Balanced Regulatory Environment
Fitch considers the regulatory environments in New York, Connecticut, Maine, and Massachusetts to be relatively balanced. Authorized returns on equity have historically been lower than the nationwide average, but the state utility commissions have allowed the use of cost recovery and revenue-stabilizing mechanisms that help reduce regulatory lag and provide stability to cash flows.
On Feb. 29, 2016, NYSEG and RGE filed a joint proposal with the New York Public Service Commission (NYPSC) for a three-year rate plan for electric and gas service commencing May 1, 2016. Other signatories to the settlement agreement include the NYPSC staff and the New York Department of State. Approval of the settlement agreement would result in a modest increase in rates based on an authorized return on equity (ROE) of 9%, with a sharing plan for realized earnings in excess of the authorized ROE. A decision by the NYPSC is expected this spring.
AVANGRID's transmission assets in Maine and Connecticut are subject to Federal Energy Regulatory Commission (FERC) regulation, which Fitch considers to be among the most constructive in the utilities sector, reflecting above-average returns (10.57% base ROE, with adders for certain critical projects) and timely recovery of invested capital.
Parent-Subsidiary Rating Linkage
There is a moderate to strong linkage between the ratings of AVANGRID and its parent, Iberdrola. 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. AVANGRID's utility subsidiaries all benefit from regulatory ring-fencing, so the long-term IDRs of the utilities reflect their standalone credit profile.
CMP
Low-Risk Business Profile
The ratings of CMP primarily reflect the low-risk business profile and stable cash flow of the utility's regulated electric T&D operations. CMP has no commodity exposure and benefits from a decoupling mechanism, which eliminates the impact of weather and usage patterns on electric revenue.
Strong Financial Metrics
CMP's financial metrics are strong. Fitch expects adjusted debt/EBITDAR to average around 3.0x-3.25x through 2018, with FFO fixed-charge coverage averaging around 6.0x-6.5x and FFO adjusted leverage averaging around 3.5x-3.75x.
Balanced Regulatory Environment
The ratemaking features provided by the Maine Public Utilities Commission (MPUC) support a stable financial profile. CMP's last rate case resulted in a settlement agreement that increased rates \\$24.3 million, or 4.5%. Rates were based on a 9.45% authorized ROE (50% of capital). The settlement established full revenue decoupling and implemented a new recovery mechanism for incremental storm restoration costs. CMP's transmission business benefits from constructive FERC regulation that provides above-average returns and timely recovery of costs.
Supportive Regulatory Ring-Fencing Measures
CMP has strong ring-fencing measures that were imposed by the MPUC in 2013 as part of the regulatory approval of AVANGRID's reorganization plan. These provisions enhance CMP's credit profile by adding a layer of protection from AVANGRID, its nonregulated renewable energy business, and ultimate parent Iberdrola.
NYSEG
Low-Risk Business Profile
The ratings of NYSEG primarily reflect the low-risk business profile and stable cash flow of the utility's regulated electric T&D and natural gas distribution operations. NYSEG has no commodity exposure and benefits from a decoupling mechanism, which eliminates the impact of weather and usage patterns on its electric and natural gas revenues.
Balanced Regulatory Environment
The ratemaking features of New York's regulatory framework such as revenue decoupling, a commodity pass-through mechanism, and use of a forward-looking test year support NYSEG's stable financial profile. However, the authorized ROE in New York State is among the lowest in the U.S. The NYPSC's decision on the pending joint proposal settlement agreement is expected this spring, and approval would provide rate certainty for the next three years.
Supportive Financial Metrics
NYSEG's financial metrics should remain supportive of the ratings, with an expected revenue increase provided by the pending general rate case. Fitch expects adjusted debt/EBITDAR to average around 3.25x-3.5x through 2018, with FFO fixed-charge coverage averaging around 5.5x-6.0x and FFO adjusted leverage averaging around 3.75x.
Strong Regulatory Ring-Fencing Measures
The NYPSC regulatory ring-fencing measures imposed through an October 2013 regulatory order that approved AVANGRID's reorganization are positive for NYSEG's credit-risk profile. The ring-fencing measures require a minimum equity to capital ratio, limit dividend distributions under certain circumstances, and the maintenance of an investment grade rating for its lowest-rated debt.
RGE
Low-Risk Business Profile
The ratings of RGE primarily reflect the low-risk business profile and stable cash flow of the utility's regulated electric T&D and natural gas distribution operations. RGE has no commodity exposure and benefits from a decoupling mechanism, which eliminates the impact of weather and usage patterns on its electric and natural gas revenues.
Balanced Regulatory Environment
The ratemaking features of New York's regulatory framework such as revenue decoupling, a commodity pass-through mechanism, and use of a forward-looking test year support NYSEG's stable financial profile. However, the authorized ROE in New York State is among the lowest in the U.S. The NYPSC's decision on the pending joint proposal settlement agreement is expected this spring, and approval would provide rate certainty for the next three years.
Robust Financial Metrics
RGE's financial metrics will likely remain strong, driven by the utility's solid operating performance and the expected result of the pending general rate case decision. Fitch expects both adjusted debt/EBITDAR and FFO adjusted leverage to remain very strong, averaging less than 3.0x through 2018, with FFO fixed-charge coverage averaging around 4.5x.
Strong Regulatory Ring-Fencing Measures
The NYPSC regulatory ring-fencing measures imposed through an October 2013 regulatory order that approved AVANGRID's reorganization are positive for RGE's credit-risk profile. The ring-fencing measures require a minimum equity to capital ratio, limit dividend distributions under certain circumstances, and the maintenance of an investment grade rating for its lowest-rated debt.
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 Renewables;
--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
AVANGRID
Positive Rating Action: A positive rating action is not likely due to the large size of the company's nonregulated renewable energy portfolio, which accounts for more than a quarter of consolidated EBITDA.
Negative Rating Action: A ratings downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.75x on a sustained basis. A ratings downgrade could also occur if ultimate parent Iberdrola, S.A. were to be downgraded below 'BBB'.
CMP
Positive Rating Action: A ratings upgrade could occur if adjusted debt/EBITDAR were expected to decrease to less than 3.0x and FFO fixed-charge coverage were expected to exceed 6.0x on a sustained basis.
Negative Rating Action: A ratings downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.75x 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.
NYSEG
Positive Rating Action: A ratings upgrade could occur if adjusted debt/EBITDAR were expected to decrease to less than 3.0x and FFO fixed-charge coverage were expected to exceed 6.0x on a sustained basis.
Negative Rating Action: A ratings downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.75x 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.
RGE
Positive Rating Action: A ratings upgrade could occur if adjusted debt/EBITDAR were expected to remain less than 3.0x and FFO fixed-charge coverage were expected to exceed 6.0x on a sustained basis.
Negative Rating Action: A ratings downgrade could occur if adjusted debt/EBITDAR were expected to exceed 3.75x 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 facility with the company's regulated utility subsidiaries CMP, NYSEG, RGE, The United Illuminating Company (UI; not rated), Connecticut Natural Gas Corporation (CNG; not rated), The Southern Connecticut Gas Company (SCG; not rated), and The Berkshire Gas Company (BGC; not rated). The 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 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 \\$427 million of unrestricted cash as of Dec. 31, 2015, 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. AVANGRID's other utility subsidiaries have aggregate long-term debt maturities of \\$10 million in 2016, \\$90 million in 2017, \\$150 million in 2018, and \\$41 million in 2019.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the following ratings, with a Stable Rating Outlook on each entity's long-term IDR:
AVANGRID
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured debt to 'BBB+' from 'BBB'.
RGE
--Long-term IDR to 'BBB+' from 'BBB';
--Senior secured debt to 'A' from 'A-';
--Senior unsecured debt to 'A-' from 'BBB+'.
Fitch has affirmed the following ratings, with a Stable Rating Outlook on each entity's long-term IDR:
CMP
--Long-term IDR at 'BBB+';
--Senior secured debt at 'A';
--Senior unsecured debt at 'A-';
--Preferred stock at 'BBB';
--Short-term IDR and commercial paper (CP) at 'F2'.
NYSEG
--Long-term IDR at 'BBB+';
--Senior unsecured debt at 'A-';
--Short-term IDR and CP at 'F2'.
RGE
--Short-term IDR at 'F2'.
Fitch has assigned the following rating:
AVANGRID
--Short-term IDR 'F2'.
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