OREANDA-NEWS. S&P Global Ratings today affirmed all its ratings on regulated water utility Aqua Pennsylvania Inc., including the 'A+' long-term issuer credit rating. The outlook is stable. Aqua Pennsylvania Inc. is a wholly owned subsidiary of Aqua America Inc. (unrated).

"The ratings on Aqua Pennsylvania [Aqua Penn] reflect the consolidated credit quality of its parent company, Aqua America Inc.," said S&P Global Ratings credit analyst Safina Ali. Aqua Penn accounts for more than one-half of consolidated Aqua America's revenues and EBITDA. Nonutility operations contribute less than 5% of consolidated revenue and EBITDA.

We assess Aqua Penn's business risk profile as excellent, reflecting its very low risk U. S.-based regulated water and wastewater distribution operations; a supportive regulatory environment with favorable cost-recovery mechanisms that enhance cash flow predictability; a large, diversified residential and commercial customer base that provides stable revenues; and solid operations with a focus on cost control. The company's elevated capital spending requirements for infrastructure replacement, increasing costs of compliance with water quality standards, and a highly acquisitive growth strategy somewhat temper the company's strengths. After considering the supportive cost recovery and strong regulatory framework and effective management of regulatory risk, we assess the business risk profile as being toward the high end of the category.

Our assessment of Aqua Penn's financial risk profile as intermediate is based on the low-volatility financial ratio benchmarks. Use of low-volatility financial benchmarks is based on the company's low-operating-risk water distribution business and its effective management of regulatory risk compared with peers. Timely rate relief and balanced financing of its growth strategy support Aqua's intermediate financial profile. Our baseline forecast results in adjusted FFO to debt of 17%-20%.

We revised our management and governance assessment on Aqua Penn to satisfactory from strong. This revision aligns our management and governance assessment on the company with those of peers and reflects our view of management's generally consistent strategy and ability to typically execute on it.

The stable rating outlook over the next two years on Aqua Penn reflects our expectation of sustained solid consolidated financial measures of parent Aqua America Inc., steady operating performance, and the company's effective management of regulatory risk. Our baseline forecast for Aqua America includes FFO to debt of about 17%-20%.

We could lower the ratings on Aqua Pennsylvania if the credit quality of the group declines including weakening business risk profile as a result of material expansion into the riskier non-utility operations or adverse regulatory outcomes. In addition, a worsening financial risk profile from weaker operating cash flow or greater debt leverage within the group could also lead to lower ratings. Specifically, we could lower the ratings if FFO to debt falls to less than 14% for Aqua America on a sustained basis.

Although less likely, we could raise the rating if FFO to debt for Aqua America consistently strengthened to greater than 22%, which could result from an improvement in the economy or deleveraging.