NEW YORK–(BUSINESS WIRE)–
Fitch Ratings has affirmed Iberdrola USA Inc.’s (IUSA) Long-term Issuer Default Rating (IDR) of ‘BBB’ following yesterday’s announcement of a definitive agreement to acquire UIL Holdings Corporation (UIL). The Rating Outlook remains Positive.
The agreement is subject to approval by the majority of UIL shareholders and the admission to trading of IUSA’s shares on the New York stock Exchange, in addition to the state and federal regulatory approvals. A full list of rating actions is provided at the end of this commentary.
In Fitch’s view the UIL acquisition improves IUSA’s credit profile given the regulated nature of UIL’s businesses and the predominant use of equity and cash to finance the acquisition. Although UIL is more leveraged than IUSA, the impact on consolidated leverage is minimal. Fitch also considers the requirement that IUSA be listed on the New York Stock Exchange to further enhance credit quality. Fitch still expects improvement in IUSA’s consolidated financial measures following the next round of rate filings in New York, supporting continuation of the Positive Outlook. Management has indicated it plans to file rate cases for both Rochester Gas & Electric Company and New York State Electric and Gas Company in 2015. Fitch’s pre-acquisition expectations were that adjusted debt/EBITDAR would improve to 3.5x or better with a constructive general rate case outcome in New York; post-acquisition, Fitch calculates adjusted debt to EBITDAR will approximate 3.5-3.6x which would support the Positive Outlook. Fitch will resolve the Positive Outlook after the successful consummation of the UIL merger and resolution of the New York rate proceedings.
The transaction is valued at $4.6 billion including $1.7 billion in UIL consolidated debt, $115 million in cash at UIL, and an acquisition price of $3 billion. UIL shareholders will receive one share in IUSA for each share held in UIL and $10.50 per share in cash. Management expects the transaction to be completed in approximately six-to-eight months, subject to approval by Federal Energy Regulatory Commission (FERC) and utility regulators in Connecticut and Massachusetts.
KEY RATING DRIVERS
Low-Risk Business Profile: IUSA’s post UIL acquisition business risk profile will be strengthened, with its ownership in regulated utilities operating in New York, Maine, Connecticut, and Massachusetts, contracted cash flows at its renewable business, and manageable capital needs to support the capex cycle at its operating companies. A balanced regulatory environment in its service territories and the constructive FERC regulated electric transmission business also support the ratings and low business risk profile.
A Constructive GRC Order in Maine: Maine Public Utility Commission (MPUC) rate order increasing distribution rates annually by $24.3 million is cash flow positive for CMP and IUSA. The approved GRC settlement also establishes a full revenue decoupling mechanism and implements a new recovery mechanism for incremental storm restoration costs, further reducing the regulatory lag.
Credit Protection Measures: Fitch adjusted debt/EBITDAR and FFO/fixed charge coverage ratios are expected to be within Fitch’s median guidelines for the assigned IDR. Fitch adjusted leverage includes an allocation of parent debt for the renewable business (Iberdrola Renewables Holding, Inc.) that was transferred to IUSA by, Iberdrola, S.A. (ISA; ‘BBB+’; Outlook Stable) without any associated debt. Fitch expects pro-forma adjusted consolidated debt to EBITDAR-based leverage at the end of 2016 to range between 3.5x-3.6x.
Manageable Capex Cycle: Fitch’s rating assumptions includes no additional debt at the IUSA level to fund capex at its regulated utilities or the renewable business. Fitch expects these elevated capital outflows will be funded by the operating subsidiaries with minimum contributions from IUSA.
A Balanced Regulatory Environment: The ratemaking features in New York, Maine, Connecticut, and Massachusetts, and the FERC’s regulatory framework support a stable utility profile. Risk of a material change in the regulatory frameworks or rate design features is low, in Fitch’s view.
Regulatory Approvals Required
The transaction requires approvals from Public Utility regulators in Connecticut and Massachusetts, and Federal Energy Regulatory Commission.
Consolidated Liquidity: Consolidated liquidity at IUSA as of Feb. 20, 2015 was $1,146 million including bank and inter-company revolving credit facilities and $530 million in cash. Total amount available under the revolving credit facilities was $886 million of which $586 million was restricted to IUSA’s regulated operating subsidiaries.
Positive: Fitch adjusted consolidated debt to EBITDAR ratio of 3.5x or less on a go-forward basis.
–Failure to achieve, on a sustained basis, Fitch adjusted debt-to-EBITDAR of 4.3x on a consolidated basis;
–A materially adverse regulatory outcome of the GRC application to be filed in 2015 in New York;
–Any deterioration in credit measures that result from higher use of leverage or outsized return of capital to shareholders.
Fitch has affirmed the following ratings.
Iberdrola USA, Inc.:
–IDR at ‘BBB’; and
–Senior unsecured debt at ‘BBB’.
The Rating Outlook remains Positive.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research
‘Corporate Rating Methodology’ (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage
- Investment & Company Information
- Fitch Ratings
- New York
- UIL Holdings Corporation
- New York stock Exchange
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