SUEZ Water Resources LLC And Subsidiary Ratings Raised To 'A' Following Updated Methodology; Ratings Off UCO

  • 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.
NEW YORK (S&P Global Ratings) Sept. 5, 2019--S&P Global Ratings today took the rating actions listed above. 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.
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.
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.
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.
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%.
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