DBRS Confirms Fortis Inc. at A (low) and Pfd-2 (low), Stable Trends

DBRS has today confirmed the Issuer Rating and ratings of the Unsecured Debentures and Preferred Shares of Fortis Inc. (Fortis or the Company) at A (low), A (low) and Pdf-2 (low), respectively, with Stable trends. The confirmation reflects the Company’s strong mix of earnings generated from regulated utilities and reasonable financing strategies for the acquisition of CH Energy Group Inc. (CHG) (the Acquisition; approximately US$1.5 billion, including US$500 million assumed debt) and the Waneta hydropower project, of which Fortis has 51% ownership.

Upon completion of the Acquisition and Waneta project, Fortis’ non-consolidated leverage is expected to increase modestly, but should be maintained within the 20% range as a result of a prudent funding mix. The 20% threshold is in line with DBRS’s rating guidelines for notching a holding company relative to its subsidiaries (see DBRS’s methodology “Rating Holding Companies and Their Subsidiaries”). In 2012, the Company completed its subscription receipt offering of approximately $601 million and preferred shares issuance of approximately $200 million, which will be used to partially fund the Acquisition and Waneta project ($116 million in capital expenditures (capex) in 2013, net to Fortis). Although cash flow coverage is expected to weaken temporarily following the Acquisition and Waneta project, it is expected to remain within the current rating category (pro forma debt-to-capital of approximately 14% in 2012).

Fortis’ business risk profile is expected to improve moderately with the Acquisition, 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 consolidated mix of approximately 90% (remainder 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 in a timely manner and earn a reasonable return on investments.

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, as DBRS believes that Fortis’ ratings are supported by strong and stable cash flows from diversified sources, with a prominent portion of dividends coming from regulated subsidiaries with “A” ratings (FortisBC Energy Inc. and Newfoundland Power Inc.).

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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