The regulatory framework is of critical importance when determining an investor-owned regulated utility's credit risk. Recent regulatory and legislative developments in Connecticut have been inconsistent with S&P Global Ratings' view of the state's regulatory framework for investor-owned utilities. The signing of Senate Bill 7 into law as well as recent less-than-credit-supportive utility rate case orders could lead to our downward reassessment of Connecticut's regulatory area.
These recent developments in Connecticut may be indicative of longer-term risks that could lead to a weakening of utility cash flow predictability and increasing regulatory lag, which we view as negative for credit quality. As such, we revised the outlooks on six of Connecticut's electric, gas, and water utilities to negative, reflecting these potentially higher risks. We expect to conclude our review of Connecticut's regulatory jurisdiction within the next 12 to 18 months following future rate case orders and our credit assessment of Connecticut's performance-based regulatory framework. Should we determine to revise downward our assessment of Connecticut's regulatory jurisdiction, it could result in downgrades for many of Connecticut's regulated utilities. Below, we address frequently asked questions about Connecticut's regulatory construct and how it affects our ratings on Connecticut-based utilities and their parent companies.
Frequently Asked Questions
How have we historically assessed Connecticut's regulatory framework?
Over the past three years, our view of Connecticut's regulatory jurisdiction has gradually diminished. In 2018, we revised upwards our assessment of Connecticut's regulatory jurisdiction to very credit supportive from more credit supportive, reflecting our opinion that various approved regulatory mechanisms would reduce regulatory lag, which is the timing difference between when costs are incurred and when regulators allow those costs to be fully recovered from ratepayers. These included multi-year rate plans and an electric system improvement charge. We expected that the implementation of these mechanisms would strengthen the recoverability of operating and capital costs, minimizing regulatory lag. However, in 2021 we revised downward our assessment of Connecticut's regulatory jurisdiction back to more credit supportive from very credit supportive. Our revision reflected our view of increasing political pressure in Connecticut that partially led to Connecticut's Public Utilities Regulatory Authority (PURA) reversing a previously approved rate increase.
We view regulatory independence as one of the key attributes that underpins the credit quality of the utility industry and expect that utilities will operate under a regulatory construct that is sufficiently insulated from political intervention, even during periods of stress, thereby protecting the utility's credit quality. Furthermore, following political criticisms related to utility restoration efforts from a tropical storm, PURA assessed penalties and return on equity (ROE) reductions that were considerably larger than past actions, which in our view, also lowered the predictability of Connecticut's regulatory framework.
Earlier this year, as customer bills significantly increased because of rising commodity costs, which is beyond a utility's control, a Connecticut state representative introduced a bill to give the general assembly the legislative authority to approve regulatorily-authorized bill increases for gas and electric utilities. Though the bill did not advance out of the Joint Energy and Technology committee, we viewed it as further evidence of continuing political interference, which we assess as negative for credit quality.
In June 2023, Senate Bill 7 was signed into law, which gives PURA greater latitude in determining whether companies over earn, prohibits PURA from reauthorizing the electric system improvements charge, and allows PURA's discretion over the use of decoupling. Previously, decoupling was codified into state law. We believe this law decreases utilities' cash flow predictability and increases regulatory lag.
Recent rate orders this year for Aquarion Co. and The United Illuminating Co. (UI) also significantly deviated from our base case. These rate orders did not approve the multiyear rate plans filed, included material disallowances, penalties for UI, and below-average returns on equity. We also expect that these rate orders will increase regulatory lag for these utilities.
|Rate case comparison|
|Aquarion Co.||The United Illuminating Co.|
|Rate increase||$49.9 million||-$2 million||$130.6 million||$23 million|
|Rate base||$1.1 billion||$992 million||$1.5 billion||$1.1 billion|
|Return on equity||10.35%||8.70%||10.20%||8.63%|
|Rate of return||7.50%||6.46%||7.47%||6.48%|
|Source: S&P CapitalIQ Pro.|
We expect utilities in regulatory jurisdictions that we assess as more credit supportive to fully recover all operating and capital costs and to operate under a consistent framework that demonstrates regulatory and cash flow stability. Because we believe the regulatory construct in Connecticut may be weakening from this level, we revised the outlooks to negative on Connecticut Light & Power Co. (A/Negative/--), Yankee Gas Services Co. (A-/Negative/--), Aquarion Co. (A-/Negative/--), UI (A-/Negative/--), Connecticut Natural Gas Corp. (A/Negative/--), SJW Group (A-/Negative/--), Connecticut Water Service Inc. (A-/Negative/--), and The Connecticut Water Co. (A-/Negative/--).
We also revised the outlook on Southern Connecticut Gas Co. (A-/Developing/--) to developing from positive. Over the next 12 to 18 months, we expect to closely monitor further regulatory developments in Connecticut, including PURA's future rate case orders and how the performance-based regulatory framework is implemented.
What are the credit implications if S&P Global Ratings revises downward its assessment of Connecticut's regulatory jurisdiction?
Should we revise downward our assessment of Connecticut's regulatory jurisdiction, it would likely lead to modest downgrades for many of Connecticut's utilities. The downgrades would reflect higher business risk for Connecticut's utilities, incorporating a more challenging regulatory construct. We would expect regulatory lag to increase, cash flow predictability and stability to decrease, and for political interference to remain.
Currently, we assess all of Connecticut's electric, gas, and water utilities as core subsidiaries of their parents. However, should Connecticut's regulatory jurisdiction become consistently more challenging than the parent's other regulated jurisdictions outside of Connecticut, we could determine that parental group support is limited for Connecticut's regulated utilities. As such, we could lower our assessment of parental group support for Connecticut's utilities, which could result in ratings downgrades.
Why did we revise our rating outlook on Eversource Energy to stable from positive?
Eversource's operations regulated by the PURA represent about 33% of its consolidated EBITDA. Although the regulatory constructs of its other regulatory jurisdictions have generally remained consistent, we believe the more challenging regulatory environment in Connecticut increases its business risk and pressures credit quality, decreasing the likelihood of an upgrade. The stable outlook on Eversource reflects our view that the company will sell its offshore wind assets and solely focus on its regulated transmission and distribution utility assets while maintaining funds from operations (FFO) to debt of 13%-14%.
Why is Avangrid Inc.'s outlook not affected by our evolving view of Connecticut's regulatory framework?
Although UI, Southern Connecticut Gas, and Connecticut Natural Gas account for about 25% of Avangrid's EBITDA, we continue to assess Avangrid as a core subsidiary of parent Iberdrola S.A. As such, the stable outlook on Avangrid is consistent with the stable outlook on parent, Iberdrola S.A.
Why do we have a developing outlook on Southern Connecticut Gas (SGC)?
Previously, we had a positive outlook on Southern Connecticut Gas due to its strengthening stand-alone financial measures. Because of the increasingly challenging environment in Connecticut, we revised the outlook to developing to reflect the possibility that we could either affirm, raise, or lower the ratings on SCG over the next 12 to 18 months. We could affirm our ratings on SCG and revise the outlook to stable if we maintain our current assessment of Connecticut's regulatory construct and SCG's stand-alone FFO to debt is below than 25%. We could also affirm our ratings on SCG and revise the outlook to stable if we revised downward our assessment of Connecticut's regulatory construct and SCG's stand-alone FFO to debt is consistently greater than 30%.
We could lower the ratings on SCG by one or more notches over the next 12 to 18 months if we revise downward our assessment of Connecticut's regulatory construct and SCG's FFO to debt is consistently below 30%. Lastly, we could raise our ratings on SCG over the next 12 to 18 months if we maintain our current assessment of Connecticut's regulatory construct, and SCG's FFO to debt is consistently greater than 25%.
Why were the outlooks on SJW Group (SJWG), Connecticut Water Service, Inc (CTWS), and Connecticut Water Co. revised to negative but the outlook on San Jose Water Co. (SJWC) was maintained at stable?
Connecticut Water accounts for about 25% of SJW Group's EBITDA. Should we revise downward our assessment of Connecticut's regulatory jurisdiction, it would likely increase business risk for Connecticut Water, CTWS, and SJWG, reflecting a weakening ability to effectively manage regulatory risk. Our negative outlooks on Connecticut Water, CTWS, and SJWG takes into account these risks.
SJWC is solely based in California and its operations are not affected by the regulatory challenges occurring in Connecticut. Furthermore, we assess the cumulative value of the insulating measures in place as sufficient to potentially rate SJWC up to two notches above SJWG's group credit profile. SJWC is currently rated only one-notch above the group credit profile, limited by its stand-alone credit profile. Accordingly, a one-notch downgrade to SJWG would not affect our issuer credit rating on SJWC.
- SJW Group, Connecticut Water Service Inc., Connecticut Water Co. Outlooks Revised To Negative On Greater Regulatory Risk, Sept. 19, 2023
- Avangrid Inc.'s Connecticut-Based Subsidiaries Outlooks Revised On Elevated Regulatory Risk, Sept. 15, 2023
- Eversource Energy Outlook Revised To Stable From Positive; Connecticut-Based Subsidiaries' Outlooks Revised To Negative, Sept. 14, 2023
This report does not constitute a rating action.
|Primary Credit Analyst:||Sloan Millman, CFA, FRM, New York + 1 (212) 438 2146;|
|Secondary Contacts:||Omar El Gamal, CFA, Toronto +1 4165072523;|
|Beverly R Gantt, New York + 1 (212) 438 1696;|
|Gabe Grosberg, New York + 1 (212) 438 6043;|
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