DBRS Updates Its Report on Fortis Inc.

DBRS has today updated its report on Fortis Inc. (Fortis or the Company). On February 21, 2012, DBRS placed the Unsecured Debentures and Preferred Shares ratings of Fortis Inc. at A (low) and Pfd-2 (low), Under Review with Developing Implications. This rating action was taken following the announced acquisition of CH Energy Group Inc. (CHG) for a total consideration of approximately US$1.5 billion, including the assumption of US$500 million of debt (the “Acquisition”). The Acquisition is expected to close in Q1 2013 subject to CHG’s shareholders and various regulatory approvals.

With the proposed Acquisition, Fortis’ business risk profile is expected to improve moderately, as approximately 97% of CHG’s earnings are generated from its regulated electric and gas regulated businesses. This regulated earnings mix is higher than the Company’s current mix at approximately 90%. The remaining 10% of Fortis’ consolidated earnings are generated from higher-risk hotel properties and non-regulated generation businesses. The regulatory framework in New York is viewed as reasonable, as CHG is allowed to recover prudently incurred operating, capital and commodity costs and earn adequate returns on investment.

The proposed Acquisition will likely increase Fortis’ non-consolidated balance sheet leverage. As at December 31, 2011, Fortis’ non-consolidated debt-to-capital was 13.6%, significantly lower than the 2010 level largely as a result of the $300 million equity issuance for the failed acquisition of Central Vermont Public Services Corporation. This leverage was well below the 20% threshold in DBRS rating guidelines for notching a holding company relative to its subsidiaries. (See DBRS’ Rating Parent/Holding Companies and Their Subsidiaries, dated March 2010.) DBRS will further review Fortis’ financing plan when it is finalized and expects the Company to finance the Acquisition in a prudent manner such that the non-consolidated debt-to-capital remains within the 20% range. The current rating could be affected if the Company’s financing plan materially exceeds the 20% threshold.

Fortis is currently rated the same as some of its subsidiaries (FortisBC Inc. and FortisAlberta Inc.) despite the structural subordination and double leverage at the parent. DBRS believes that Fortis’ ratings are supported by strong and stable cash flows from diversified sources, with a significant portion of dividends coming from its regulated subsidiaries with “A” ratings (FortisBC Energy Inc. and Newfoundland Power Inc.).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.