DBRS Removes Fortis Inc. from Under Review with Developing Implications

DBRS has today removed Fortis Inc.’s (Fortis or the Company) ratings from Under Review with Developing Implications (following the announced acquisition (the Acquisition) of CH Energy Group Inc. (CHG) on February 21, 2012). DBRS has also confirmed the ratings of Unsecured Debentures and Preferred Shares of the Company at A (low) and Pdf-2 (low), respectively, with Stable trend. The confirmation is based on the closing of subscription receipt offering (approximately $600 million) in June 2012 and further review of the Company’s financing plan. DBRS is comfortable that Fortis’s funding strategy includes appropriate measures to maintain a reasonable financial profile while executing its growth strategy, particularly the Acquisition (approximately $1.0 billion, plus $500 million in debt assumption) and the Waneta hydro power project (total $450 million in investment, $250 million required in 2012).

Fortis’s non-consolidated balance sheet leverage is expected to increase notably. However, given its current financial flexibility with non-consolidated debt-to-capital at near 14% and strong cash flow coverage, DBRS believes that Fortis’s financing plan is reasonable, such that the debt leverage within the 20% range can be maintained in-line with DBRS’s rating guidelines for notching a holding company relative to its subsidiaries. (See DBRS Criteria: Rating Parent/Holding Companies and Their Subsidiaries, dated March 2010.) Following the Acquisition and the financing of the Waneta project, cash flow coverage is expected to weaken temporarily but should still remain within the current rating category.

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 businesses. This regulated earnings mix is higher than the Company’s current mix at approximately 90%. The remaining 10% of Fortis’s 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 good returns on investment.

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’s 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 applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.