20230308Cagle Rebuttal Exhibits.PDF

Preston N. Carter, ISB No. 8462
Blake W. Ringer, ISB No. 11223
Givens Pursley LLP 601 W. Bannock St. Boise, Idaho 83702 Telephone: [phone]
Facsimile: [phone]
[e-mail] [e-mail]
Attorneys for Veolia Water Idaho, Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
VEOLIA WATER IDAHO, INC. FOR
WATER SERVICE IN
CASE NO. VEO-W-22-02
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT NO. 18 TO ACCOMPANY THE
REBUTTAL TESTIMONY OF JAMES CAGLE
RECEIVED
2023 March, 8 4:42PM
IDAHO PUBLIC
UTILITIES COMMISSION
Research Update:
SUEZ Water Resources LLC And Subsidiary Ratings
Raised To 'A' Following Updated Methodology;
Ratings Off UCO
September 5, 2019
Rating Action Overview
- We have reviewed our ratings on SUEZ Water Resources LLC (SWR) and its subsidiary SUEZ
Water New Jersey Inc. (SWNJ) that we labeled as "under criteria observation" (UCO) after
publishing our revised Group Rating Methodology criteria on July 1, 2019.
- Following this review, we established that the cumulative value of the structural protections in
place between SWR and ultimate parent SUEZ S.A. (SEV) are sufficient to insulate our issuer
credit rating on SWR from the credit profile of ultimate parent SEV.
- As such, we are raising our long-term issuer credit ratings on SWR and SWNJ to 'A' from 'A-' and
are removing our ratings on both companies from UCO.
- We are also raising our issue-level ratings on SWR's senior unsecured debt and SWNJ's
secured debt to 'A' from 'A-'.
- At the same time, we are revising our stand-alone credit profile (SACP) on SWNJ to 'aa' from
'aa-', consistent with management's strategy to gradually reduce its debt at the SWNJ utility
level. Because of the absence of insulating measures between SWNJ and SWR, the ratings on
SWNJ are equalized with those on SWR.
- The stable outlooks largely reflect our view of SWR's low-risk, rate-regulated water and
wastewater utility operations as well as our expectation that management will continue to
reach constructive regulatory outcomes and avoid any meaningful rise in business risk. The
outlooks also reflect our base-case forecast of adjusted funds from operations (FFO) to debt of
about 13%-16% over the next few years.
Rating Action Rationale
The upgrades follow our review of our ratings on SWR and SWNJ under our revised Group Rating
Methodology criteria, which we published on July 1, 2019. Following this review, we removed our
ratings on the companies from UCO.
Research Update:
SUEZ Water Resources LLC And Subsidiary Ratings
Raised To 'A' Following Updated Methodology;
Ratings Off UCO
September 5, 2019
PRIMARY CREDIT ANALYST
Sloan Millman
New York
+ 1 [phone]
[e-mail]
SECONDARY CONTACT
Obioma Ugboaja
New York
+ 1 [phone]
obioma.ugboaja
@spglobal.com
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Case No. VEO-W-22-02 Exhibit No.18 Cagle
Page 1 of 8
Under our revised criteria, we view the strength of SWR's SACP, as well as the cumulative value of
structural protections in place that insulate SWR from SEV, as reason to warrant the upgrades.
Our analysis of the insulating measures takes into account the following:
- The intermediary holding company between SWR and SEV (SUEZ Utility Holdings Inc.) is a
separate legal entity with its own capital structure, maintains its own records, does not
commingle funds, assets, or cash flows with the rest of the SEV group, and does not participate
in a money pool with the rest of the SEV group;
- SWR has its own credit facility and debt arrangements and has operations that are separate
from the rest of the SEV group;
- We believe there is a strong economic basis for the SEV group to preserve the credit strength of
SWR, reflecting SWR's low risk, profitable, and regulated operations;
- PGGM is a significant minority shareholder of SUEZ Utility Holdings Inc. and has an active
economic interest with board member representation;
- The governance rights in place for PGGM surrounding matters such as dividend distributions
and voluntary bankruptcy filings support our view that there are independent directors who
have effective influence on decision making;
- Anti-dilutive measures in place to ensure that PGGM can maintain its economic interest at
current levels; and
- There are no cross-default provisions between the rest of the SEV group and SUEZ Utility
Holdings Inc. (or its subsidiaries) and the minority shareholder's governance rights supports our
opinion that a default at SEV would not directly lead to a default at SWR or its subsidiaries.
While we assess the above structural insulating measures as sufficient to insulate the ratings on
SWR from the group credit profile by as many as three notches, we are upgrading SWR one notch
above the group credit profile because the issuer credit rating on SWR is limited by its SACP. We
rate SWNJ in line with SWR since we consider it to be an integral and fully supported subsidiary of
SWR that is dependent on SWR for its financing arrangements. Furthermore, we deem SWR to be a
strategically important subsidiary of SEV.
Our assessment of SWR's and SWNJ's business risk profiles are based on both entities' lower-risk
and rate-regulated water and wastewater utility businesses. SWR serves about 2.1 million
customers across New Jersey, New York, Delaware, Rhode Island, Pennsylvania, and Idaho,
whereas SWNJ serves about 1.2 million customers in New Jersey and New York. We view both
companies' management of regulatory risk as above average, partially reflecting the extensive use
of constructive regulatory mechanisms, including distribution system improvement charge (DSIC)
riders, a revenue decoupling mechanism, and multiyear rate plans in certain jurisdictions. Under
our base-case scenario, we expect that the companies will continue to effectively manage
regulatory risk, in part due to the frequency of rate case filings, and will continue to use riders that
we collectively view as favorable for both companies' credit quality.
We assess SWR's and SWNJ's financial risk profiles using our low-volatility financial benchmark
table, which reflects the companies' lower-risk, regulated utility businesses, and effective
management of regulatory risk. Under our base-case scenario for SWR of capital spending
averaging about $300 million-$350 million through 2021, dividend payments to its owners
commensurate with the company's capital structure, continued rate case filings, and further use
of the DSIC, we expect SWR's FFO to debt to be 13%-16%, consistent with the lower end of the
range for the intermediate financial risk profile category. This warrants our use of a negative
comparable ratings analysis modifier, which results in a one-notch downward adjustment to the
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S&P GLOBAL RATINGS360 September 5, 2019 2
Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
Page 2 of 8
company's SACP.
Given SWR's strategy to provide funding to SWNJ going forward without issuing debt at the SWNJ
level, we expect financial measures at SWNJ to strengthen, indicative of the minimal financial risk
profile category. Specifically, under our base-case scenario of capital spending that averages
about $200 million through 2021, continued rate case filings, and further use of the DSIC, we
expect SWNJ's FFO to debt to consistently exceed 35%. However, given our holistic view of the
company's business risk, financial risk, and dependence on SWR for financing needs, we utilize a
negative comparable ratings analysis modifier to lower SWNJ's SACP by one notch.
Outlook
The stable outlooks on SWR and SWNJ reflect our view of SWR's low-risk, rate-regulated water
and wastewater utility operations as well as our expectation that management will continue to
reach constructive regulatory outcomes and avoid any meaningful rise in business risk. The
outlooks also reflect our base-case forecast of adjusted FFO to debt at SWR and SUEZ Utility
Holdings Inc. of about 13%-16% over the next few years. Furthermore, the outlook reflects our
expectation that the companies' unrated ultimate parent SEV will continue to maintain a diverse
mix of businesses and financial measures that do not materially deviate from our current view of
the overall group credit profile.
Downside scenario
We could lower our ratings on SWR and SWNJ over the next 24 months if unrated intermediary
holding company SUEZ Utility Holdings Inc.'s financial measures weakened such that we forecast
FFO to debt to be consistently below 12%. We could also lower the ratings if the structural
insulating measures currently in place weaken.
Upside scenario
We could raise the ratings on SWR and SWNJ if SUEZ Utility Holdings Inc.'s financial measures
strengthen, reflecting FFO to debt consistently greater than 16%.
Liquidity– SUEZ Water Resources LLC
SWR has adequate liquidity in our view and can cover its needs for the next 12 months, even if
EBITDA declines by 10%. We expect the company's liquidity sources over the next 12 months will
exceed uses by more than 1.1x. Under our stress scenario, we do not expect that SWR would
require access to the capital markets to meet its liquidity needs. SWR also benefits from generally
prudent risk management, sound relationships with banks, and a generally satisfactory standing
in the credit markets.
Principal Liquidity Sources
- Credit facility availability of about $150 million;
- FFO of about $205 million; and
- Proceeds from sale of assets of about $5 million-$10 million.
Principal Liquidity Uses
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S&P GLOBAL RATINGS360 September 5, 2019 3
Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
Page 3 of 8
- Long-term debt maturities of about $5 million;
- Maintenance capital spending of about $180 million; and
- Dividends to owners commensurate with the company's capital structure.
Liquidity– SUEZ Water New Jersey Inc.
SWNJ has adequate liquidity in our view and can cover its needs for the next 12 months, even if
EBITDA declines by 10%. We expect the company's liquidity sources over the next 12 months will
exceed uses by more than 1.1x. Under our stress scenario, we do not expect that SWNJ would
require access to the capital markets to meet its liquidity needs. SWNJ also benefits from
generally prudent risk management, sound relationships with banks, and a generally satisfactory
standing in the credit markets.
Principal Liquidity Sources
- FFO of about $115 million; and
- Expected ongoing support from SWR as needed.
Principal Liquidity Uses
- Minimal long-term debt maturities;
- Maintenance capital spending of about $115 million; and
- Dividends to SWR commensurate with the company's capital structure.
Issue Ratings - Subordination Risk Analysis
Capital structure
SWR's capital structure includes close to $975 million of consolidated senior unsecured debt,
including about $155 million of debt issued at SWNJ.
Analytical conclusions
We rate SWR's senior unsecured debt 'A', in line with our issuer credit rating on the company, due
to the lack of material priority debt in the company's capital structure.
We rate the senior secured debt at SWNJ 'A', as we view it as unsecured debt of a qualifying
investment grade utility as per our criteria.
Ratings Score Snapshot– SUEZ Water Resources LLC
Issuer Credit Rating
A/Stable/--
Business risk: Excellent
- Country risk: Very low
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S&P GLOBAL RATINGS360 September 5, 2019 4
Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
Page 4 of 8
- Industry risk: Very low
- Competitive position: Excellent
Financial risk: Intermediate
- Cash flow/Leverage: Intermediate
Anchor: a+
Modifiers
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Financial policy: Neutral (no impact)
- Liquidity: Adequate (no impact)
- Management and governance: Satisfactory (no impact)
- Comparable rating analysis: Negative (-1 notch)
Stand-alone credit profile: a
- Group credit profile: a-
- Entity status within group: Insulated
Ratings Score Snapshot– SUEZ Water New Jersey Inc.
Issuer Credit Rating
A/Stable/--
Business risk: Excellent
- Country risk: Very low
- Industry risk: Very low
- Competitive position: Excellent
Financial risk: Minimal
- Cash flow/Leverage: Minimal
Anchor: aa+
Modifiers
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Financial policy: Neutral (no impact)
- Liquidity: Adequate (no impact)
- Management and governance: Satisfactory (no impact)
- Comparable rating analysis: Negative (-1 notch)
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S&P GLOBAL RATINGS360 September 5, 2019 5
Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
Page 5 of 8
Stand-alone credit profile: aa
- Group credit profile: a
- Entity status within group: Core (-3 notches below the SACP)
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March
28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Dec. 16, 2014
- Criteria - Corporates - Industrials: Key Credit Factors For The Environmental Services Industry,
Feb. 12, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- Criteria | Corporates | Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19,
2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate
Entities, Nov. 13, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
Upgraded
To From
SUEZ Water Resources LLC
SUEZ Water New Jersey Inc.
Issuer Credit Rating A/Stable/--A-/Stable/--
SUEZ Water Resources LLC
Senior Unsecured A A-
SUEZ Water New Jersey Inc.
Senior Secured A A-
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
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S&P GLOBAL RATINGS360 September 5, 2019 6
Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
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Research Update: SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO
Case No. VEO-W-22-02 Exhibit No.18 Cagle
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S&P Global Ratings | Research | September 5, 2019 8
Case No. VEO-W-22-02 Exhibit No.18 Cagle
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