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Montgomery County Industrial Dev Auth, PA -- Moody's affirms Pennsylvania-American Water's ratings; outlook stable

Rating Action: Moody's affirms Pennsylvania-American Water's ratings; outlook stable

Global Credit Research - 27 Aug 2020

New York, August 27, 2020 -- Moody's Investors Service, ("Moody's") today affirmed the ratings (including the A3 long-term issuer rating; a full list of the affected ratings is provided at the end of this press release) of Pennsylvania-American Water Company (PAWC) based on Moody's expectation that the utility will maintain a stable financial profile, such that the ratio of funds from operations (FFO) to net debt averages around 19% over the next three years. The outlook remains stable.

Affirmations:

..Issuer: Clarion (County of) PA, I.D.A.

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Clarion County Industrial Dev. Auth., PA

....Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Luzerne County Industrial Dev. Auth., PA

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Montgomery County Industrial Dev Auth, PA

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Senior Secured Revenue Bonds, Affirmed A1

....Underlying Senior Secured Revenue Bonds, Affirmed A1

..Issuer: Pennsylvania-American Water Company

.... Issuer Rating, Affirmed A3

Outlook Actions:

..Issuer: Pennsylvania-American Water Company

....Outlook, Remains Stable

RATINGS RATIONALE

"Pennsylvania-American Water's credit reflects very supportive regulatory treatment in Pennsylvania, strong cost recovery provisions and a steady financial profile. We calculate an average ratio of funds from operations to net debt around 19%" said Ryan Wobbrock Vice President -- Senior Credit Officer. "Moreover, the company benefits from being one of the largest utility subsidiaries within the American Water Works corporate family" added Wobbrock.

PAWC has a low business risk profile as a rate regulated water distribution utility and operates in a supportive regulatory environment with ongoing cost recovery provided by key rate mechanisms (e.g., the Distribution System Infrastructure Charge that allows for annual recovery of roughly $150 million of related capital spending), relatively high levels of equity capitalization (estimated to be over 53%) and an allowed return on equity estimated at 10%. This should help PAWC keep stable financial ratios, even though the company will begin to return over $300 million of excess deferred income taxes to customers upon conclusion of its current general rate proceeding.

The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Moody's expects PAWC to be resilient to recessionary pressures related to the coronavirus because of its rate-regulated, essential service business model. Nevertheless, Moody's is watching for water usage declines, utility bill payment delinquency, and the regulatory response to counter these effects on earnings and cash flow. As the events related to the coronavirus unfold, Moody's is taking into consideration a wider range of potential outcomes, including more severe downside scenarios.

The effects of the pandemic could result in financial metrics that are weaker than expected; however, Moody's sees these issues as temporary and not reflective of the core operations or long-term financial or credit profile of PAWC.

Environmental considerations incorporated into Moody's credit analysis for PAWC are primarily related to climate change risks, which are generally highest for the sector in terms of supply variability and exposure to natural and man-made disasters, including flooding and soil/water pollution. These and other severe weather conditions could disrupt operations, change water usage patterns and have negative financial impacts on the company.

Social risks are primarily related to health and safety, demographic and societal trends, as well as customer relations as the company works to provide reliable and affordable service to customers and safe working conditions to employees. Regarding affordability, Moody's sees the potential for rising social risks associated with the COVID-19 pandemic and its effect on PAWC's service territory, should unemployment remain high, making customers less able to absorb rate increases.

The company's governance is reflective of that of its parent, which has very strong governance practices, particularly in the areas of compensation disclosure, transparency of financial reporting and audit quality.

Outlook

The stable outlook for PAWC reflects its ability to generate FFO to net debt metrics in the 16-19% range over the next few years, even when implementing tax reform requirements. The outlook also assumes that any COVID-19 related issues will be temporary and that supportive regulatory treatment for timely cost recovery continues.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

PAWC could be upgraded with improved regulatory provisions for operating or capital costs or if FFO to net debt exceeds 19% on a sustainable basis, along with improved cost recovery provisions (e.g., revenue decoupling).

Factors that could lead to a downgrade

PAWC could be downgraded if FFO to net debt declines below 16%, consistently, or if regulators become less supportive of timely and adequate cost recovery. The rating could also be downgraded if operational challenges resulted in weaker service performance.

Pennsylvania-American Water Company is a regulated water utility headquartered in Camden, New Jersey and a subsidiary of American Water Works Company, Inc., also headquartered in Camden, New Jersey.

The principal methodology used in these ratings was Regulated Water Utilities published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121971. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ryan Wobbrock VP - Senior Credit Officer Public Proj & Infrastr Fin Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Public Proj & Infrastr Fin JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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