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Investing.com -- S&P Global Ratings has revised its outlook on H2O America (HTO) to negative from stable while affirming its ratings, following the company’s announced acquisition of Quadvest.
The rating agency said Tuesday that HTO’s planned $540 million acquisition of Quadvest in 2026 will modestly weaken its consolidated financial measures. Under S&P’s base-case forecast, which assumes the company funds the acquisition with $100 million-$200 million of debt, HTO’s consolidated funds from operations (FFO) to debt ratio is expected to fall below the 11% downgrade threshold.
For 2024 and the 12 months ended March 2025, HTO’s consolidated FFO to debt was 12.0% and 12.3%, respectively. The company was already operating with minimal financial cushion relative to the downgrade threshold due to robust capital spending on water supply resilience, system upgrades, regulatory compliance, and environmental challenges.
S&P noted that potential improvement in HTO’s financial measures depends on deleveraging or an increase in its rate base from the fair market valuation of Quadvest’s regulated utility assets. HTO has requested a fair market valuation from the Public Utility Commission of Texas (PUCT). If approved at the fair market valuation, the company is expected to seek higher regulated base rates for Quadvest to reflect this valuation.
Additionally, Quadvest’s regulated utility anticipates significant customer growth and capital spending in its metro-Houston service territory, which could support rate base expansion in the near term.
Despite HTO’s solid market access, S&P highlighted execution risk in the company’s large funding plan. The $540 million transaction will be funded with a mix of common equity and long-term debt, adding to HTO’s existing $2 billion capital spending program for 2025-2029. While HTO has consistently raised common equity annually since 2021, including through a $200 million at-the-market program, the Quadvest acquisition represents HTO’s largest to date.
Meanwhile, S&P maintained a stable outlook on HTO’s subsidiary SJW (NYSE:SJW), which it currently rates one notch above the group credit profile. The agency cited SJW’s insulation measures, independent financial performance and funding, separate legal incorporation, and regulatory oversight by the California Public Utilities Commission as factors supporting this rating differential.
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