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Investing.com -- S&P Global has revised its outlook for SJW (NYSE:SJW) Group (SJWG) and its Connecticut subsidiaries, Connecticut Water Service Inc. (CTWS) and Connecticut Water Co. (CWC), to stable from negative, based on improving financial measures. The consolidated funds from operations (FFO) to debt ratio for SJWG improved to 12% in 2024. This improvement was due to customer growth, rate case increases, and lower cash taxes.
Despite an increase in capital spending, S&P Global expects SJWG’s consolidated financial measures to consistently remain above the downgrade threshold of an FFO to debt ratio of 11%. All ratings for SJWG, CTWS, and CWC, including the ’A-’ long-term issuer credit ratings and the ’A-’ issue-level rating on CWC’s senior unsecured debt, have been affirmed.
The stable outlooks for SJWG, CTWS, and CWC are based on the expectation that the consolidated FFO to debt ratio will consistently be greater than 11%. This expectation holds even in the face of robust capital spending, with a projected consistent FFO to debt ratio of 11%-12% through 2027.
SJWG’s consolidated FFO to debt ratio for 2022 and 2023 was 9.6% and 9.8% respectively. The 2024 increase to 12% is attributed to rate increases in California and Connecticut totaling about $40 million, rising customer growth in Texas, and lower cash taxes primarily due to an uncertain tax position reserve related to repair expenditure.
SJWG recently announced a 25% increase in its five-year capital plan to about $2 billion for 2025-2029. This increase reflects rising infrastructure investments aimed at enhancing water supply resilience, upgrading aging systems, ensuring regulatory compliance, and addressing environmental challenges. S&P Global expects the company to fund its robust capital spending plan in a manner that maintains credit quality.
SJWG’s business risk profile remains excellent, reflecting its geographically diverse regulated utility operations serving approximately 410,000 customer connections across four states. The company is expected to manage its regulatory risk effectively through consistent rate case filings and various regulatory mechanisms across its multiple jurisdictions.
Despite some weakening in Connecticut’s regulatory construct, S&P Global anticipates that CWC will manage Connecticut’s regulatory risk better than its local utility peers. This expectation is supported by a June 2024 rate case order for CWC, which authorized a $6 million revenue increase, predicated on a 9.3% return on equity (ROE).
Over the next 24 months, S&P Global could lower ratings on SJWG, CTWS, and CWC if the consolidated FFO to debt ratio weakens to consistently below 11%. This could occur due to adverse regulatory decisions in key jurisdictions, including in California or Connecticut, or if the company’s robust capital spending is not funded in a credit-supportive manner.
Conversely, ratings on SJWG, CTWS, and CWC could be raised over the next 24 months if SJWG improves its consolidated financial measures such that its FFO to debt ratio consistently exceeds 15% without any increase to business risk.
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