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Rating Action:

Moody's downgrades Avangrid to Baa2, NYSEG and RG&E to Baa1 and upgrades CNG to A2; all outlooks stable.

20 Jul 2021

New York, July 20, 2021 -- Moody's Investors Service ("Moody's") today downgraded the long-term ratings of Avangrid, Inc. to Baa2 from Baa1 and the long-term ratings of its two New York utilities, New York State Electric and Gas Corporation (NYSEG) and Rochester Gas & Electric Corporation (RG&E) to Baa1 from A3.

At the same time, Moody's affirmed Avangrid's P-2 commercial paper rating and upgraded Connecticut Natural Gas Corporation (CNG) to A2 from A3. A list of all affected debt securities can be found toward the end of this press release.

The outlooks for Avangrid, NYSEG, RG&E and CNG are stable.

RATINGS RATIONALE

"Avangrid's financial profile exhibits a sustained period of higher leverage amid a period of high execution-risk capital projects" said Ryan Wobbrock, Vice President -- Senior Credit Officer. "Despite the strategic and financial support evidenced by its majority owner, Iberdrola S.A. (Baa1 stable), Avangrid's targeted ratio of CFO pre-WC to debt of about 14.5% is consistent with the Baa2 rating category for a low-risk, diversified utility holding company" added Wobbrock.

The downgrade of Avangrid reflects 1) weaker financial ratios, such as cash flow from operations before changes in working capital (CFO pre-WC) to debt of 16% through LTM Q1 2021 (normalized to exclude a now-retired term loan), which has declined from an average of approximately 23% during the 2015-2018 timeframe and is expected to decline to about 13% in 2022, 2) a $4 billion higher-risk capital program through 2025, $3.1 billion of which is for first-time construction of utility-scale offshore wind generation resources in the US and $1.0 billion for a contested 1,200 megawatt electric transmission line in Maine, and 3) heightened political influence and uncertainty in utility rate making, including financial penalties, in Avangrid's two largest regulatory environments, New York (representing about 30% of total utility rate base) and Connecticut (roughly 20% of consolidated rate base).

Since Avangrid's 2015 initial public offering (IPO) of 18.5% ownership, the company has maintained a more standalone financing approach for organic operations, including the issuance of about $2.1 billion of public long-term holding company debt, and maintains its own $2.5 billion revolving credit facility. Since the IPO, the company has also been paying a consistent dividend to its owners, now targeting a 65-75% payout ratio.

At the same time, we recognize the supportive ownership and sizeable balance sheet of Iberdrola, which has shown considerable influence in Avangrid's bid to acquire PNM Resources, Inc. (PNMR, Baa3 stable), including the infusion of $3.26 billion of equity (which replaced an intercompany $3.0 bridge loan) and helping to facilitate the remaining $740 million equity purchase with an external party. We view Iberdrola's efforts to maintain 81.5% ownership of Avangrid as further evidence of the strategic importance that US investments play for Iberdrola and its earnings growth targets.

We recognize Iberdrola's influence and support in the financial thresholds for factors that could change Avangrid's Baa2 rating (i.e., consistently below 13% for a downgrade to Baa3 or above 16% to be upgraded to Baa1), which are more lenient than most Baa2-peer ratios. We also see limits in Iberdrola's support, since there is no formal guarantee of Avangrid's debt obligations.

New York Utilities

The downgrade of NYSEG and RG&E reflect the financial implications of their combined three year rate plan, which will keep CFO pre-WC to debt ratios in the mid-teen's range over the next two years, in addition to heightened political intervention into New York's utility rate making and financial performance.

For both utilities, we expect financial ratios to improve over their LTM Q1 2021 levels (e.g., about 7% for NYSEG and 14% for RG&E) due to backloaded revenue increases for the April 2020 -- April 2023 rate plan, as a way to help customers face the 2020 economic hardships of the COVID-19 pandemic. Despite the year-over-year revenue improvement, cash flow growth will be mitigated by other rate features, such as excess depreciation reserves and amortization of regulatory assets and liabilities. We expect the net effect of these rate features will result in CFO pre-WC to debt ranging between 12-16% for both companies over the next two-to-three years.

These financial ratios are down from historical levels while political intervention into utility finances has increased. Over the past two years, we have observed heightened gubernatorial rhetoric, regulatory investigations, and legislative proposals that risk higher financial penalties for utility underperformance and challenge utility franchise rights. These efforts undermine the consistency and predictability of the state's regulatory framework, at minimum, and could also hurt the legislative and judicial underpinnings of the New York utility regulatory environment if punitive laws are passed.

Connecticut Natural Gas

CNG's upgrade to A2 reflects the company's strong financial performance, underpinned by strong cost recovery provisions for operating and capital expenditures and the ability to earn solid returns.

Despite greater uncertainty within Connecticut regarding the future regulatory framework (e.g., legislation has been passed that includes the potential for a performance-based rate paradigm) and greater uncertainty associated with political and regulatory support of some utilities (mostly electric distribution companies), we believe that CNG is better positioned than most peers to continue its strong financial performance. This is due to CNG's gas distribution asset profile, 55% equity capitalization and ongoing rate recovery of about $25 million of infrastructure replacement investments that will be maintained after its rate plan expires in 2021. As such, we believe that CNG will produce CFO pre-WC to debt metrics at or above 25% over the next 12-18 months.

Outlooks

Avangrid's Baa2 rating and stable outlook reflects its market position as a diversified utility holding company, underpinned by its low-risk Networks business and highly contracted Renewables segment that should generate ratios of CFO pre-WC to debt between 13% and 15% over the next three years, assuming some balanced funding of major projects with debt and equity. The stable outlook also incorporates the prospects for further geographic diversity and lower business risk due to its $8 billion acquisition of PNMR. The acquisition is still pending and requires approval from the Public Service Commission of New Mexico, which Avangrid expects to receive by year-end 2021.

NYSEG and RG&E's stable outlooks incorporate a view that currently weak financial metrics should improve over the next two years to the mid-teen's percent range. The outlooks also consider a more unpredictable political environment in New York, which could result in more financial penalties on state utilities in the coming years.

CNG's stable outlook reflects CFO pre-WC to debt ratios expected to remain above 25% and the strong regulatory provisions inherent in its current rate plan, which will remain intact until the company files for new general rates.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

Avangrid's rating could be upgraded if CFO pre-WC to debt were to improve to 16% or higher, with a significant portion of large capital projects having been completed.

NYSEG and RG&E's ratings could be upgraded if CFO pre-WC to debt ratios achieved 19% on a sustainable basis and political intervention moderated.

CNG's rating could be upgraded if stability and supportiveness in the Connecticut regulatory framework were to be maintained while the company's financial metrics were to improve, such as CFO pre-WC to debt in the high 20% range on an ongoing basis.

Factors that could lead to a downgrade

Avangrid's rating could be downgraded if CFO pre-WC to debt were to fall further, below 13% for a sustained period; if the large capital projects experience significant cost overruns or delays; or if regulatory and political support for the Networks business deteriorates further.

NYSEG and RG&E's ratings could be downgraded if CFO pre-WC to debt ratios decline consistently below 14% or if the New York regulatory and political environment become incrementally more punitive.

CNG's rating could be downgraded if the Connecticut regulatory framework and the company's cost recovery provisions were to become less supportive, or if CNG's financial metrics were to decline, such that the ratio of CFO pre-WC to debt were closer to 20%.

Headquartered in Orange, CT with approximately $39 billion in assets and operations in 24 U.S. states, AVANGRID has two primary lines of business: Avangrid Networks and Avangrid Renewables. Avangrid Networks owns eight electric and natural gas utilities, serving more than 3.3 million customers in New York and New England. Avangrid Renewables owns and operates a portfolio of renewable energy generation facilities across the United States.

Iberdrola, S.A., a corporation organized under the laws of the Kingdom of Spain, owns 81.5% of the outstanding common stock of Avangrid. The remaining outstanding shares are publicly traded on the New York Stock Exchange and owned by various shareholders.

Affirmations:

..Issuer: Avangrid, Inc.

....Senior Unsecured Commercial Paper, Affirmed P-2

Downgrades:

..Issuer: Avangrid, Inc.

.... Issuer Rating , Downgraded to Baa2 from Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

..Issuer: New York State Electric and Gas Corporation

.... Issuer Rating, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: Indiana County I.D.A., PA

....Senior Unsecured Revenue Bonds, Downgraded to Baa1 from A3

..Issuer: New York State Energy Research & Dev. Auth.

....Senior Secured Revenue Bonds, Downgraded to A2 from A1

....Underlying Senior Secured Revenue Bonds, Downgraded to A2 from A1

....Senior Unsecured Revenue Bonds, Downgraded to Baa1 from A3

....Underlying Senior Unsecured Revenue Bonds, Downgraded to Baa1 from A3

..Issuer: Rochester Gas & Electric Corporation

.... Issuer Rating, Downgraded to Baa1 from A3

....Senior Secured First Mortgage Bonds, Downgraded to A2 from A1

....Underlying Senior Secured First Mortgage Bonds, Downgraded to A2 from A1

Upgrades:

..Issuer: Connecticut Natural Gas Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to A2 from A3

Outlook Actions:

..Issuer: Avangrid, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Connecticut Natural Gas Corporation

....Outlook, Changed To Stable From Positive

..Issuer: New York State Electric and Gas Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Rochester Gas & Electric Corporation

....Outlook, Changed To Stable From Negative

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ryan Wobbrock
VP - Senior Credit Officer
Infra Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infra Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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