New York, March 01, 2011 -- Moody's Investors Service today assigned a Baa1 Issuer Rating to Aquarion
Water Company of Connecticut ("Aquarion"). The rating outlook is
stable. This is the first time that Moody's has rated Aquarion.
New England based Aquarion is a relatively small regulated water utility
primarily serving parts of western CT including the cities of Bridgeport
and Stamford. Although operating in some form since 1857,
it is currently owned by a consortium of investors led by Macquarie Group.
Aquarion's ownership structure is complex as it has two smaller
sister water subsidiaries in NH and MA and all are held under two intermediate
parent holding companies. These entities are ultimately owned by
Aquarion Holdings LLC. ("Holdings"). Holdings
(not rated), was the primary vehicle for acquiring the water utilities
in 2007. Holdings incurred approximately $320 million of
debt associated with this transaction and it remains leveraged relative
Aquarion's Baa1 issuer rating reflects the company's positive
attributes including its long operating history, stability afforded
by regulated cash flows, investment-grade credit metrics,
good relationship with state regulatory authorities, largely residential
customer base and a modest near-term capital spending profile.
The rating also considers several challenges in our view, including
the company's small size and geographic concentration, the
significant amount of debt issued at the parent level, limited ring-fencing
at Aquarion, lack of a dedicated external credit line, and
modest trending decline of water consumption due to conservation efforts.
This rating comes at a time when Aquarion and its related companies are
actively addressing certain refinancing and liquidity needs. These
actions include, 1) refinancing approximately $320 million
of term loan debt at Holdings, 2) establishing a new $70
million (approximately) senior unsecured revolving credit facility at
Aquarion's intermediate parent, and 3) refinancing current notes
payable to Holdings with a planned $40 million senior unsecured
tax-exempt note offering at Aquarion as well as two smaller long-term
note offerings at Aquarion's sister-subsidiaries. This first
time rating and stable outlook for Aquarion is in part based on the expected
successful closing of the above mentioned transactions. We expect
the refinancing at Holdings to occur by early Q2-2011 and the newly
installed revolving credit facility and note offerings to occur contemporaneously
or shortly thereafter. Material delays in these events or associated
impacts on liquidity would be viewed negatively.
Stand alone, Aquarion's capital structure is straightforward.
At September 30, 2010 the operating company reported $208
million of long-term debt and $42 million of short-term
borrowings payable to Holdings. On a historical basis credit metrics
are well positioned for the Baa1 rating category. For example,
for the three year period from 2007-2009, Aquarion achieved
average funds from operations to debt of 20% and FFO interest cover
of 4.7 times, these would both be considered in the "A"
range, for water utilities as outlined in our Global Regulated Water
Utilities Methodology. However, an additional metric we look
to is retained cash flow (FFO -- dividends) cover of capital spending.
On this measure the company has averaged .72 times over the same
period, a level more associated with the "Ba" range,
reflecting the somewhat aggressive dividend policy in recent years.
Although Connecticut can sometimes be viewed as a challenging regulatory
jurisdiction, we believe the company continues to maintain a constructive
relationship with the DPUC. We note the company's last general
rate case fully litigated in 2010, concluding with a revenue increase
of 11.3%, and an authorized ROE of 9.95%.
While we believe the company's capital spending level is moderate,
dividends have at times been in excess of current period earnings,
and in recent years, Aquarion's profile has been managed to
a modest negative free cash flow position (CFO-div-capex).
Over the next several years we expect the company will generally manage
its up-streamed dividends within generated earnings, while
aligning its capital structure to, at least, sustain its current
level of metrics.
In contrast to the investment grade utility profile at the utility,
the consolidated profile, at the Holdings level, is substantially
more levered. Approximately $320 million of term debt used
to finance the acquisition remains (maturing April 2012) and accounted
for 50% of consolidated debt at December 31, 2009.
Although not rated, this is a significant amount of non-operating
company debt and this structural subordination would typically result
in at least a two notch differential between the parent and utility operating
company. Further, the consolidated financial profile of Holdings
is at or below what is typically demonstrated for investment-grade
water utility holding companies. From 2008-2009, Holdings
generated average FFO to debt of 6.4% and FFO interest cover
of 2.1x. Both of these are more representative of the "Ba"
range as outlined in Moody's methodology. Consequently, there
is not a large cushion to absorb any unexpected financial deterioration
at Aquarion, the primary cash flow driver. The absence of
strong regulatory ring-fencing at Aquarion also implies that any
future incremental weakness of Holdings could result in downward pressure
on the rating of Aquarion as opposed to any implied wider "notching"
down of Holdings.
Aquarion's regulated internal cash flows and moderate capital requirements
provide the primary basis for the company's good liquidity profile,
modest negative free cash flow notwithstanding. Externally,
liquidity is currently provided by $98 million of committed credit
lines at Holdings (an $83 million capex line and a $15 million
working capital line). Holdings has approximately $60 million
currently drawn under these lines. We view this arrangement as
less than optimal given 1) that the lines are not based at the borrower
(Aquarion), and 2) the presence of material adverse change language
for ongoing borrowings.
However, as noted above, we expect these lines to be terminated
upon the establishment of a new facility at Aquarion's intermediate parent,
Aquarion Company by early Q2-2011. We expect this line to
be initially sized at $70 million with amounts drawn at closing
to be reduced with subsequent long-term financings at the subsidiaries,
most importantly, the $40 million of water facility revenue
bonds at Aquarion.
The stable outlook reflects Moody's expectation that Aquarion will continue
to maintain a financial profile consistent with its Baa1 Issuer Rating.
Weakness at the parent level, or up-streamed dividends from
Aquarion that pressure its stand alone metrics would likely negatively
impact the rating.
The principal methodology used in this rating was Global Regulated Water
Utilities published in December 2009.
Headquartered in Bridgeport, CT, Aquarion is a regulated water
utility company serving approximately 181 thousand customers in the state.
Aquarion reported revenues of $129 million in 2009
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Assigns Baa1 Issuer Rating to Aquarion Water Company of Connecticut; Outlook Stable
250 Greenwich Street
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