S&P: ITC Midwest LLC 'A-' Rating Affirmed; Outlook Negative
"Our downward revision of ITC Midwest's stand-alone credit profile to 'aa-' from 'aa' and our assessment of a negative comparable rating analysis [CRA] modifier are based on our expectation that ITC Midwest's financial measures will reflect the very low end of the modest financial risk profile on a forward-looking basis," said S&P Global Ratings credit analyst Tyler Smith. This incorporates the potential for lower authorized returns on equity (ROEs) and rate refunds due to ongoing ROE complaints. Specifically, we expect adjusted funds from operations (FFO) to debt of 23%-24%.
Our 'aa-' SACP on ITC Midwest is based on our assessments of an excellent business risk profile and modest financial risk profile.
ITC Midwest's business risk profile reflects its lower-risk, fully regulated electric transmission business that operates under credit-supportive regulation by the Federal Energy Regulatory Commission (FERC). Under formulaic FERC regulation, ITC Midwest has the ability to recover its costs and returns on investment on a forward-looking basis, based on a regulated capital structure of 40% debt and 60% equity. Overall, we view the company as effectively managing regulatory risk. Our view of ITC Midwest's business risk profile also includes the company's geographic diversity, with operations in parts of Iowa, Minnesota, Illinois, and Missouri; its stable track record of maintaining transmission system reliability; and strong profitability metrics.
We assess ITC Midwest's financial risk profile as modest, using our low volatility table. The use of this table results from the vast majority of the company's cash flows coming from lower-risk transmission operations and the company's effective management of regulatory risk. Our base-case scenario includes anticipated lower earnings due to rate refunds related to the pending ROE complaints, the company's election of bonus depreciation, and modestly reduced growth. On a forward looking basis, we forecast FFO to debt of 23%-24%, consistent with the lower end of the modest financial risk profile category.
The negative outlook on ITC Midwest reflects the probability that we could downgrade Fortis Inc. following its acquisition of parent ITC Holdings Corp. The negative outlooks on ITC Midwest and ITC Holdings incorporates Fortis' execution and integration risks, as well as the likelihood that Fortis' consolidated financial measures could weaken because of increased consolidated debt from the acquisition's financing.
We could downgrade ITC Midwest following Fortis' acquisition of ITC Holdings if Fortis' consolidated financial measures weaken such that FFO to debt remains consistently below 10%. This could occur if there are adverse regulatory conditions imposed on the acquisition, if Fortis faces operational difficulties, or if there are material cost overruns from post-merger integration efforts. We could also lower the rating on ITC Midwest if ITC Holdings' consolidated FFO to debt drops consistently below 9%.
We could affirm the rating on ITC Midwest and revise the outlook to stable if ITC Holdings' consolidated FFO to debt consistently approximates 10% and Fortis' consolidated FFO to debt is consistently above 10%. This could occur if the acquisition is completed with sufficient equity and in a manner that preserves Fortis' credit measures.