Tucson Electric Power Co.

The negative outlook on TEP reflects our outlook on its parent, Fortis Inc. The negative outlook on Fortis reflects our view that the utility holding company's metrics will be weak over our two-year outlook period, including adjusted funds from operations (FFO) to debt of about 10%. We would downgrade TEP if we downgrade Fortis. This could occur if Fortis' financial measures weaken such that its FFO to debt remains below 10% with no prospects for improvement. We could revise our outlook on TEP to stable if we do the same for Fortis. This could occur if Fortis improves its financial measures, including FFO to debt remaining consistently near 11% or above, without any increase in its business risk. TEP will

...TEP is a regulated, vertically-integrated utility that operates under a generally supportive framework.Most of TEP's operations and cash flow come from low-risk regulated utility operations with constructive regulatory mechanisms to support timely cash flow recovery, such as the purchased power and fuel adjustment clause (PPFAC) to help with the recovery of commodity costs and the lost fixed cost recovery (LFCR) mechanism to mitigate the revenue impact of lost sales associated with energy efficiency and distributed generation requirements under the ACC's renewable energy standards. Large capital spending plan over the outlook period. TEP has a large capital program for 2020-2021 that will total more than twice its depreciation cost and weaken its credit metrics during our outlook period. Lack of geographic and regulatory diversity. TEP serves the City of Tucson and the surrounding southeastern region of Arizona with a relatively small customer base of about 429,000. Compared with other...

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