Credit reductions and negative investment forecasts continue to ripple through the state utility industry, with S&P Ratings lowering its rating on an affiliate of the Connecticut Water Company because of what it called the state’s “unpredictable” regulatory climate.
S&P, in a report issued last week, said Connecticut Water and its corporate affiliates are in solid financial condition. But the agency said it is concerned that the company could be weakened in the future by being the subject of what have been described by analysts as the sort of adverse rate decisions imposed on other utilities by Connecticut regulators over the last two years.
“We view the more recent Connecticut rate case orders over the past two years as not credit supportive and materially below our base case expectations,” S&P said. “In general, we expect a utility to operate in a regulatory jurisdiction that is supportive of credit quality, allowing for the full recovery of all operating and capital costs in a timely manner, operating under a consistent and predictable regulatory framework that results in cash flow stability.”
Going forward, S&P said it expects Connecticut water “will be increasingly subject to” below average return on equity, delays in approvals to recover money already invested in its systems and difficulty in achieving the returns on equity “within Connecticut’s regulatory jurisdiction.”
S&P cuts credit ratings of CT gas companies CNG and SCG, citing adverse regulatory climate
“These developments will increase cash flow volatility and decrease financial performance stability while also weakening a company’s ability to consistently manage regulatory risk,” it said.
S&P did not lower the credit rating for Connecticut Water, but rather the credit profile of its Connecticut holding company, meaning the business will not experience higher borrowing costs to finance operations. The report said the company invests from $110 to $200 million a year on operations in Connecticut and Maine.
The company declined to discuss the ratings report and Connecticut Water President Craig Patla said, “We remain committed to delivering reliable and high-quality water to our customers and communities.”
S&P said the trigger for what amounts to a negative of the local parent company of the Connecticut Water Co., which serves 107,000 costumes in 60 towns, was decisions last month by the Public Utility Control Authority to slash requests for rate increases by Avangrid subsidiaries Connecticut Natural Gas and Southern Connecticut Gas.
“These rate orders follow a more recent pattern of PURA rate case orders for its electric, gas and water utilities that have been consistently below our expectations,” S&P said.
As a result, S&P said it believes “Connecticut’s regulatory construct has become less credit supportive” for Connecticut Water and its local holding company Connecticut Water Service Inc.
The gas company credit ratings were lowered twice this month, first by S&P and later by Moody’s Ratings. Those reductions followed S&P’s downgrade this month of Eversource and subsidiaries in Connecticut and elsewhere in New England. Other downgrades also followed adverse rate decisions on United Illuminating and Aquarion Water dating back two years.
PURA’s November gas company orders cut revenues to levels below what they were allowed to collect through rates six and seven years ago. PURA cut CNG revenue $24 million or more than 5%, and $11 million, or approximately 2.5%, for SCG. CNG had sought a $19.7 million increase and SCG wanted an additional $43 million.
Consumer Counsel Clare Coleman said that the gas companies set themselves up for a credit drop by “overearning” and pursuing a “bloated” rate increase.
“We are not surprised that market analysts are reacting to a company manufactured problem, explicitly stated in the most recent Moody’s report, that there was a considerable disparity between the filed rate request and the ultimate rate order in the CNG/SCG rate case,” Coleman said.
“When a company files a bloated rate increase request, even when already overearning from customers, the gap between application and the regulator’s order will likely result in a concerning reaction from credit rating agencies. More reasonable rate applications based on financial need would likely narrow this delta and avoid these investor concerns.”
Marissa Gillett, Gov. Ned Lamont’s choice to chair PURA and increasingly a target of utility criticism, has said that her position as a quasi-judicial regulator prevents her from discussing matters before the authority. Supporters have backed PURA decisions, claiming utilities have profited excessively and spent irresponsibly in the past.
The utilities complain that “arbitrary and inconsistent” regulatory decisions by PURA are responsible for the credit downgrades that will increase customer bills, already among the highest in the nation, by increasing carrying costs on the billions of dollars utilities borrow to finance operations.
Eversource also has said adverse rulings by PURA have prevented it from recovering investments in its systems through customer rates and will cause it to redirect capital spending to operations in other states.
Coleman’s office, in a Q&A distributed last week on utility credit downgrades, suggested they are not necessarily a bad thing for consumers. The Q&A pointed out that, in the case of the gas company downgrades, the increase to customer bills due to increased utility borrowing costs is likely to be smaller than the decrease resulting from the PURA rate cut that triggered the downgrades.
Utility executives called the view “short sighted.”
