Fitch Ratings has assigned a 'BBB' rating to American Transmission Systems, Inc.'s (ATSI) senior note issuance.
The notes are ATSI's senior unsecured obligations ranking equally with all of ATSI's outstanding and future unsecured and unsubordinated obligations. Proceeds from the debt issuance will be used to redeem maturing debt, repay regulated money pool borrowings, finance capital expenditures, fund working capital and for general corporate purposes. ATSI's Issuer Default Rating (IDR) is 'BBB-'. The Rating Outlook is Positive.
Key Rating Drivers
Recent Developments: ATSI is an operating subsidiary of intermediate holding company FirstEnergy Transmission, LLC (FET; BB+/Positive) and an indirect subsidiary of ultimate corporate parent, FirstEnergy Corp. (FE; BB+/Positive). Fitch affirmed ATSI's IDR at 'BBB-' in October and November of 2021, revising its Rating Outlook to Stable from Negative in October and to Positive in November.
The recent rating actions and Outlook revisions primarily reflect rating linkage with and constructive credit developments at FE. Such developments include: a deferred prosecution agreement in the federal government's criminal investigation into Ohio House Bill (HB)6; the filing of a settlement agreement of regulatory issues in Ohio; and, the announcement of deleveraging asset and equity sales. ATSI's ratings also reflect the company's relatively low business risk and solid credit metrics.
Parent and Subsidiary Rating Linkage: ATSI's rating linkage with FET and FE is moderate. Fitch takes a bottom up approach in determining ATSI's ratings, recognizing its close strategic, operational and financial ties with FE. ATSI's corporate parent has a centralized treasury and management structure and is dependent on cash distributions from its operating subsidiaries, including ATSI, to meet its obligations. ATSI participates in FE's utility money pool and relies on sub-limits under the transmission companies' bank facility to meet its liquidity needs.
ATSI has direct access to debt capital markets, is regulated by the Federal Energy Regulatory Commission (FERC) on a cost-of-service basis and subject to jurisdictional capital requirements. An upgrade of FE would likely result in an upgrade at ATSI.
Low Stand-Alone Business Risk: ATSI's ratings and Positive Outlook consider the transmission company's low, stand-alone business risk profile and relatively predictable earnings and cash flows. FERC rate regulation is balanced, in Fitch's opinion, and includes forward-looking test years, formula-based rates with annual true-up and relatively attractive authorized ROEs. These factors mitigate regulatory lag and Fitch's concerns regarding ATSI's large investment program. Fitch projects FFO leverage of better than 4.5x during 2022-2024, supporting ATSI's ratings and Positive Outlook.
Large Capex Program: ATSI is targeting 2021 and 2022 transmission capex of $350 million and $390 million, respectively. Those amounts account for approximately 33% of FE's total 2021 transmission investment of $1.1 billion and 26% of FE's expected 2022 transmission investment of $1.5. ATSI's transmission build-out is designed to improve FE system reliability and customer service, facilitate clean energy and is expected to consist of a large number of relatively small projects.
FERC Developments: Several issues at FERC remain at various stages of regulatory and judicial review, including determination of authorized ROE and incentive rate mechanisms, among other things.
Fitch expects earned returns at ATSI will remain competitive. However, lower ROE determinations at FERC cannot be ruled out and would, all else equal, put downward pressure on ATSI's projected earnings and cash flows, weakening its credit metrics. Significant deterioration in FERC regulation could result in future credit rating downgrades at ATSI. Management estimates that a 1% change in ATSI's ROE would result in a $21 million revenue impact.
Derivation Summary
ATSI is an operating subsidiary of FET, which in turn is owned by FE. Rating linkage with FET and ultimate corporate parent, FE, is moderate. ATSI's transmission business benefits from its low operating risk profile and constructive FERC rate regulation. The transmission utility is relatively small in size compared with peer AEP Transmission (AEPT), but larger than sister company Mid-Atlantic Interstate Transmission. As of Dec. 31, 2020, ATSI had total assets of $5.2 billion, which compares with AEPT's $11.2 billion of total assets and MAIT's total assets of $2.2 billion. ATSI is well-positioned compared with higher-rated peers AEPT, GridLiance West and GridLiance High Plains, with FFO leverage at ATSI expected to approximate 4.0x or better 2021-2023.
Key Assumptions
Investment of $350 million in 2021 and $390 million in 2022;
Continued balanced FERC regulation.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade at FE along with FFO leverage sustaining at 5.0x or lower;
Continued balanced FERC rate regulation.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
An adverse rating actions at FE;
FFO leverage sustaining at 6.0x or higher due to deterioration in regulatory oversight or other factors;
An unexpected catastrophic outage or event.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: ATSI's liquidity position is generally solid, in Fitch's opinion, bolstered by FE's deferred prosecution agreement (DPA) with the U.S. government. As a result of the DPA, Fitch believes liquidity challenges due to disclosure corrupt activity as happened in the past is unlikely to be repeated.
In October 2021. FE, FET and certain distribution and transmission utility subsidiaries entered into six separate senior unsecured five-year syndicated revolving credit facilities (RCFs) with total borrowing capacity of $4.5 billion. The RCFs provide borrowing capacity of up to $1 billion collectively for FE and FET, $800 million for OE, CE and TE, $950 for ME, PN, WP and PP, $500 million for JCP&L, $400 million for MP and PE, and $850 million for ATSI, MAIT and TrAIL. The credit facilities are available until Oct. 26, 2026.
As of Oct. 25, 2021, FE had total available liquidity of $5.1 billion, composed of $557 million of cash and cash equivalents and available borrowing capacity of $4.5 billion under the RCFs. ATSI had full availability up to its sublimit under the transmission companies' revolving credit facility of $500 million as of Oct. 25, 2021.
Issuer Profile
ATSI owns high voltage transmission facilities consisting of 7,890 miles of transmission lines in the PJM Interconnection, LLC region. ATSI plans, operates and maintains its transmission system in accordance with the North American Electric Reliability Corporation's reliability standards and other regulatory requirements.
Date of Relevant Committee
12 November 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
DIGERATI TECHNOLOGIES, INC. 