S&P Lifts Outlook on ITC Holdings (ITC) to Stable; Ratings Affirmed
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S&P Global Ratings today affirmed its 'A-' issuer credit rating (ICR) on ITC Holdings Corp. (NYSE: ITC) and subsidiaries International Transmission Co., Michigan Electric Transmission Co., ITC Midwest LLC, and ITC Great Plains LLC. We also affirmed our 'BBB+' rating on ITC's senior unsecured debt and our 'A' rating on the subsidiaries' first-mortgage bonds, reflecting no change to the '1+' recovery rating.
"The rating actions reflect the completion of the merger with Fortis, including our view that Fortis' credit metrics will stabilize in 2017 onwards, with adjusted FFO to debt at about 10.5% for the next two years," said S&P Global Ratings credit analyst Tyler Smith. The outlook revision for ITC further reflects our expectation that ITC's business and financial risk continues to reflect the company's stand-alone credit fundamentals at the current ratings despite its change in ownership.
Our ratings on ITC incorporate our assessment that ITC is not fully integral to the identity and strategy of Fortis, but is likely to be supported in most foreseeable circumstances. Our assessment of ITC's business reflects the company's lower-risk electric transmission business. ITC is regulated by the Federal Energy Regulatory Commission (FERC), and we view FERC's regulation of electric transmission companies as supportive of credit quality through timely cost recovery mechanisms, forward-looking rate-setting, and rates based on capital structures with as much as 60% equity. Overall, we view the company's management of regulatory risk as better than peers, reflecting the company's general ability to consistently earn its authorized returns.
Our assessment of ITC's financial risk incorporates less stringent metric benchmarks due to the company's lower-risk utility business operations and effective management of regulated risk. Under our base-case scenario, we expect FFO to debt to range from 10%-12% based in part on capital spending of approximately $700 million for the next two years and modestly lower returns due to recent complaints challenging FERC's authorized returns. The company's capital spending program will result in negative discretionary cash flow for the next three years.
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 adjusted FFO to debt at about 10.5%.
We could lower the ratings if ITC's stand-alone financial measures weaken, including an FFO-to-debt ratio that consistently falls below 9%. This could occur if adverse regulatory outcomes impede ITC's ability to effectively manage regulatory risk. We could also lower the ratings on ITC if we lower the ratings on ultimate parent, Fortis.
We could raise the rating if we upgrade Fortis and ITC's stand-alone financial ratios improve, reflecting FFO to debt that is consistently greater than 13%.
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