S&P Lifts Outlook on Fortis (FTS) to Stable; Ratings Affirmed
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S&P Global Ratings said it revised its outlook on Fortis Inc. (NYSE: FTS) to stable from negative. At the same time, S&P Global Ratings revised its outlook on Fortis subsidiaries FortisAlberta Inc. and Caribbean Utilities Co. Ltd. to stable from negative. S&P Global Ratings also affirmed its ratings on Fortis and its subsidiaries, including its 'A-' long-term corporate credit rating on Fortis.
"We base the outlook revision on Fortis' completion of the acquisition of ITC Holdings Corp.," said S&P Global Ratings credit analyst Stephen Goltz.
We believe that that most of uncertainties related to the ITC acquisition have been resolved. These include the sale of a 19.9% equity interest in ITC to GIC Private Ltd., a Singapore-based sovereign wealth fund; the completion of debt-financing consistent with our base-case forecast; and the receipt of all required regulatory and shareholder approvals.
In addition, the outlook revision reflects our view that credit metrics will stabilize in fiscal 2017 onward, with adjusted funds from operations (AFFO)-to-debt at about 10.5% during our two-year outlook period. The acquisition has removed much of the cushion in Fortis' credit metrics and leaves little room for operational or post-merger integration risk. Based on our forecast, for Fortis to breach the downgrade trigger, FFO would need to decrease permanently by about C$105 million (about C$250 million in regulated revenue, net of energy cost). However, given that the vast majority of the company's cash flow and operations are regulated and our overall view of the regulatory environments in which Fortis operates, this is unlikely without an adverse material regulatory ruling.
The ratings on Fortis and the level of support that we ascribe to each of these subsidiaries from the parent reflect our group rating methodology.
The stable outlook reflects S&P Global Ratings' view of Fortis' stable and predictable cash flow, underpinned by the company's regulated operations with generally supportive regulatory frameworks. During our two-year outlook period, we expect Fortis to focus on its regulated businesses, including the ITC integration. Although credit metrics will be weak in 2016 due to the timing of the acquisition's closing, we expect credit metrics to stabilize and improve during our outlook period, with AFFO-to-debt at about 10.5%.
We could take a negative rating action on Fortis if the company's AFFO-to-debt were to fall below 10% during our outlook period. This could happen because of cost overruns from post-merger integration efforts with ITC, material adverse regulatory decisions, Fortis encountering operational difficulties that lead to unexpected increased costs or material debt-funded acquisitions.
We could take a positive rating action if Fortis improves its financial position, with AFFO-to-debt approaching 15% with no increase in business risk. However, based on our financial forecast, the ITC acquisition, and the company's capital programs, we believe the prospect of a positive rating action is highly unlikely during our outlook horizon.
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