Fortis Inc. And Most Subsidiary Outlooks Remain Negative; Outlook On Caribbean Utilities Revised To Negative

  • St. John, Newfoundland-based utility holding company Fortis Inc. has executed on its deleveraging plan to strengthen the company's financial measures since 2019, including the sale of noncore assets and an equity issuance of about C$1.2 billion, with most of the proceeds used to pay down debt at the holding company level and to fund capital expenditures.
  • However, other headwinds, including the current COVID-19 pandemic, plummeting oil prices, and the increasing likelihood of a global economic recession could weaken the company's ability to sustain the improvement in its consolidated financial measures. Our outlook on Fortis and most of its subsidiaries remains negative, reflecting the potential over the next six to 12 months for weaker consolidated financial measures should the COVID-19 pandemic or macroeconomic downturn persist.
  • We are affirming our 'A-' issuer credit rating (ICR) on Fortis and 'BBB+' senior unsecured debt rating.
  • We are also affirming our 'BBB' rating on the company's preferred shares on the global scale and 'P-2' on the Canada National Preferred Share scale.
  • We are affirming our ratings on insulated subsidiary Central Hudson Gas & Electric Corp. (CHG&E) including the 'A-' ICR and senior unsecured debt ratings; our outlook on CHG&E is stable.
  • For Tucson Electric Power Co. (TEP), we are affirming our 'A-' ICR and senior unsecured debt ratings; the outlook is negative.
  • For Caribbean Utilities Co. Ltd. (CUC), we are affirming our 'BBB+' ICR and senior unsecured debt ratings. However, we are revising the outlook to negative from stable.
  • For FortisTCI (FTCI), we are affirming our 'BBB' ICR; the outlook is negative.
  • For Maritime Electric Co. Ltd. (MECL), we are affirming the 'BBB+' ICR; the outlook is stable. We are affirming the 'A' rating on the first-mortgage bonds (FMB); the recovery rating remains '1+'.
  • We are affirming our ratings on FortisAlberta Inc. (FAB), including the 'A-' ICR; the outlook is negative. At the same time, we are revising the group relationship between FAB and Fortis to moderately strategic from core.
  • The negative outlook on Fortis and most of its subsidiaries reflects the potential over the next six to 12 months for weaker consolidated financial measures should the COVID-19 pandemic or macroeconomic downturn persist.
TORONTO (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The ratings affirmation on Fortis and subsidiaries reflect the parent's execution of its deleveraging plan over the past year and improved financial measures.  In 2019, Fortis divested noncore asset Waneta for about C$1.0 billion. In addition, in November 2019, Fortis issued common equity of about C$1.2 billion. The use of the proceeds from the asset sale and share issuance were mostly used for debt repayment and for capital funding. As a result, Fortis' credit metrics improved in 2019 with funds from operations (FFO) to debt at 11.3% compared to that of 9.6% in 2018.
The negative outlook on Fortis reflects potential risks of a sustained COVID-19 pandemic, and a global economic recession both of which could pressure Fortis' credit metrics.  This includes the potential weakening of the company's ability to sustain the financial cushion that it has built over the past year. Specifically, Fortis has operations in British Columbia and parts of New York State, areas that have been affected by the COVID-19 outbreak, suggesting the potential for sales decline. In addition, Fortis has operations in the Caribbean region (about 5% of Fortis' consolidated cash flow), where tourism is a material contributor to the local economy, which could experience steep declines because of the pandemic. Moreover, Fortis has operations in the Alberta where oil production is an important contributor to the local economy. We expect plummeting oil prices in recent months to pressure FortisAlberta's cash flow in the short term. As a result, our outlook on Fortis remains negative as we assess the impact these events could have on Fortis' ability to sustain its recently improved financial measures over the next six to 12 months.
The negative outlook on Fortis Inc., Tucson Electric Power, and Fortis Alberta reflects the potential inability for Fortis to sustain its recently improved financial measures because of the COVID-19 pandemic, and a potential global recession. During our two-year outlook period, we forecast the company's adjusted FFO to debt ratio of about 10.5%, assuming a short-term impact from COVID-19.
We could downgrade Fortis over the next six to 12 months if the company's financial measures weaken with FFO to debt approaching or consistently at10% or below. This could happen if the COVID-19 pandemic persists and has a material long-term impact on the company's financial measures or the company experiences adverse regulatory decisions. In addition, any deterioration of business risk, including expansion of nonregulated operations or acquisitions that increase the company's reliance on generation within its integrated utility operations, could also lead to a downgrade.
We could revise the outlook to stable over the next six to 12 months if Fortis can maintain its financial measures with FFO to debt consistently at or above 10.5% without any increase in business risk. This could happen if Fortis maintains its current business strategy, COVID-19 does not have a material impact on the company's financial measures, and the regulators are supportive in the aftermath of COVID-19 recovery.
The stable outlook on Central Hudson Gas & Electric reflects our expectation that the company's stand-alone financial measures over our two-year outlook period will consistently reflect the middle of the range for the significant financial risk profile category. Specifically, we expect FFO to debt to be about 17%-18%. The stable outlook also incorporates existing insulating measures that could protect the issuer credit rating on CHG&E by up to two notches if we were to downgrade parent Fortis Inc.
We could lower the rating over our two-year outlook period if CHG&E's stand-alone financial measures weaken, including an FFO to debt ratio that consistently falls below 15%. This could occur if adverse regulatory outcomes impede CHG&E's ability to manage regulatory risk.
We could raise the ratings over the same period if CHG&E improves its financial measures such that FFO to debt is consistently above 20% or if the utility improves its management of regulatory risk such that it is consistently greater than that of its peers.
The negative outlook on Caribbean Utilities reflects our view that the COVID-19 pandemic could potentially have a severe impact on Cayman's tourism industry, an important industry to the country's economy. This in turn could affect CUC's financial measures. Over our outlook period, we forecast FFO to debt ranging from 13%-16%, assuming a short-term impact from COVID-19.
We could downgrade CUC over the next six to 12 months if the company's business risk increases and its financial measures weaken with FFO to debt consistently below 13%. This could happen if the COVID-19 pandemic has a material long-term impact on the utility.
We could revise the outlook on CUC to stable if we conclude that the COVID-19 pandemic does not raise longer-term business risk for CUC, with FFO to debt consistently above 13%, and trending toward 14%-16%, a range that supports the current ratings.
The negative outlook on Fortis TCI reflects our view that the COVID-19 pandemic could have a severe impact on the company's stand-alone financial measures, dampening our expectation for improvement in the company's financial measures. During our outlook period, we forecast the company's FFO to debt ratio of about 14% in 2020. This assumes a short-term impact from COVID-19 before recovering to about 18% by 2021.
We could take a negative rating action on FTCI over the next six to 12 months if the company's financial measures weaken with FFO to debt consistently below 15%. This could happen if the COVID-19 pandemic persists and has a material long-term impact on FTCI's financial measures, the company experiences material operational issues or material adverse regulatory decisions.
We could revise the outlook to stable over the next six to 12 months if FTCI improves its financial position, with FFO to debt consistently above 15%, without any increase in business risk. This could happen if COVID-19 does not have a material long-term impact on the company's financial measures.
The stable outlook on Maritime Electric Co. Ltd. reflects S&P Global Ratings' view that it will continue generating stable cash flows with no adverse regulatory or governmental rulings. During our two year outlook period, we expect FFO to debt of about 15%-18%.
We could downgrade MECL if the company's financial measures weaken with FFO to debt consistently below 15%.

We could raise the ratings on MECL if the company's financial measures improve with FFO to debt above 22% consistently, all else equal.
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