UI Statement on Return on Equity (ROE) Filing with Public Utilities Regulatory Authority

Company’s financial integrity continues to chip away as earned ROE slips another 21 basis points from last quarter, falling to just 3.73 percent


ORANGE, Conn. — November 4, 2024 — Frank Reynolds, President and CEO of United Illuminating (UI), a subsidiary of Avangrid, Inc. (NYSE: AGR), today issued the following statement regarding the company’s regulatory filing with the Public Utilities Regulatory Authority (PURA) containing its calculation of an earned Return on Equity (ROE) of 3.73 percent for the preceding 12 months ending on September 30, 2024:

“Despite UI’s best efforts to manage costs and preserve our financial integrity, we cannot withstand the financial degradation brought upon us by the entirely deficient rates PURA approved last year. After falling below four percent last quarter, our Return on Equity only continues to decline, slipping again to 3.73 percent.

As our Return on Equity continues to slide both prior to and following our most recent rate case, PURA’s failure to adequately consider our financial integrity, as is its obligation, is indisputable. In other states, after utilities complete a lengthy, arduous rate case, their efforts are justified by their newfound profitability: regulators have hit the refresh button, matching new rates against inflation, infrastructure investments, workforce expenses, and all other costs a company has accrued since its previous rate case.

On the other hand, following UI’s most recent rate case completed in August 2023, PURA refused to take that reasonable regulatory path by refusing to match our rates against our costs. Consequently, UI’s ROE has not improved since its conclusion: it has only continued to slide, again and again and again. As we have been saying for 15 months, that is clear evidence PURA’s miniscule rate increase was not only insufficient, but punitive and arbitrary. Credit rating agencies are noticing: just last week, Moody’s called our credit ‘constrained by a challenging… regulatory environment,’ as indicated by PURA’s ‘unconstructive’ rate decision for UI in 2023.

UI can only invest at the level that PURA allows us to recover. Without adequate credit, even those limited investments will become more expense. Because PURA has not provided us with sufficient revenues to run the company, UI is now operating on the margins of the investments that PURA previously enabled us to make over the last several decades. When those margins run out – and make no mistake, the question is when, not if, they run out – PURA’s actions and inaction will mean homes and businesses across south-central Connecticut will face worsened reliability, more frequent outages, and higher electric bills.

It's not too late to turn around this no-win scenario. Our impending rate case filing will give PURA another opportunity to make good on its obligation to maintain the financial integrity of the utilities it regulates. They must take notice of our ROE’s unabated decline and take decisive action to shore up our financial integrity. If they do not, customers will only face more painful consequences in the future.” – Frank Reynolds, President and CEO of UI


Background

 

  • Return on Equity is a measure of a company’s financial performance, calculated by dividing distribution net income by shareholder’s equity (which is the company’s assets minus its debt). Put simply, Return on Equity measures the company’s profitability.
     
  • For regulated utilities such as UI, PURA sets an upper limit on what utilities are allowed to, but are in no way guaranteed, to earn in their ROE. Following PURA’s Final Decision in UI’s 2023 rate case (Docket #22-08-08), the company is authorized to earn up to an ROE of 8.63 percent, inclusive of penalties. The company’s actual third-quarter 2024 earnings are less than half its allowed ROE and a 21-basis point drop over last quarter’s already devastating 3.94 percent, indicating unabated financial degradation.
     
  • For an ROE to be sufficient, it must, at the very least, exceed UI’s financing costs, or the cost of borrowing, which is currently above 5 percent. The current actual ROE of 3.73 percent is, therefore, substantially insufficient to attract investment to fund operations and capital projects. This is having and will continue to have a consequential negative impact on UI’s ability to attract capital to invest in the safety, reliability, and resiliency of its electric grid. Investments, like new substations and protective flood walls, are already being deferred, and without significant improvements, customers will bear the consequences with poorer quality of service.
     
  • For the preceding 12 months, PURA instructed the company to write off nearly $24 million, while simultaneously prohibiting the company from including these write-offs when reporting its ROE. The impact of these write-offs on the earned Return on Equity for the 12 months ended on September 30, 2024 is -3.19 percent. Had UI included the write-offs in its ROE calculation, they would result in an ROE of just 0.53 percent (where 3.72 percent minus 3.19 percent = 0.53 percent).
     
  • In the company’s view, reporting ROE without the write-offs falls far short of representing the deep financial harm that PURA’s final decision in UI’s most recent rate has exacted on the company and its ability to serve its more than 343,000 customers. UI is pursuing legal action against PURA in part for this stunning prohibition on transparent and complete reporting.
     
  • On October 31, Moody’s Ratings issued its Credit Opinion regarding UI, holding the company at Baa1 stable. The rating agency wrote in part, “UI's credit is constrained by a challenging political and regulatory environment in Connecticut, where the predictability and timeliness of cost recovery is less certain, due to several legislative and regulatory actions, including the unconstructive 25 August 2023 Public Utility Regulatory Authority (PURA) rate order.” Among credit challenges, Moody’s expounded that UI has “very weak financial metrics, due to temporary regulatory account movements; more challenging and less predictable Connecticut legislative and regulatory environment; [and] 2023 distribution rate order changed recovery provisions to be less timely and included various ROE penalties and cost disallowances.” 

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