Category: Issue Comments

Issue Comments

YLO Court Battle Looming?

Tim Kiladze of the Globe and Mail reports:

But there have been rumblings of anger from some creditor groups about the way the spoils are being divided, and the company’s bankers and convertible debenture holders – who own bonds that can be converted into common shares – escalated frustrations last week by separately hiring lawyers and going public with their grievances.
…
On Monday, the banking group, which is made up of the Big Six banks and Caisse Centrale Desjardins, and which is owed $369-million by Yellow Media, will appear in Quebec court to voice its arguments.
…
Banks and convertible debenture holders both argue they were treated unfairly by Yellow Media because they were not consulted before the restructuring plans were made public. The banks accuse the company of using “a divide and conquer strategy” by negotiating only with a small group of bondholders, and they want the process to start over.
…
At the moment, it is unclear how receptive the court will be to both groups’ complaints because their legal rights are murky. The debt restructuring has already been deemed to be fair by financial advisers BMO Nesbitt Burns and Canaccord Genuity.

But that hasn’t stopped the groups from putting forth their arguments. In a motion filed in Quebec court, the banking group, represented by McMillan LLP, states that “creditors are the parties with the primary economic interest in an insolvent entity, and they are, and must be, involved in shaping the terms of a plan that will govern any compromise or arrangement of their debt.”

The convertible debenture holders are also upset at “having been excluded completely from the consultative process” said lawyer Avram Fishman at Fishman Flanz Meland Paquin LLP, and they can’t understand why “they were not asked whether they agreed with [the proposed arrangement] or what provisions could be changed to induce them to accept it.”

The proposed reorganization has been reported on PrefBlog. I suspect that I might recommend a negative vote by preferred shareholders – who may well be able to vote separately as a class – on the grounds that the plan assumes forced conversion by preferreds into old common, which is then converted on harsh terms into new common.

In other words, the plan appears (appears! Pending my review of final documentation!) to be a worst-case scenario alread for the preferred shareholders … and why should they vote “Yes” if they’re not being paid to vote “Yes”?

YLO has four series of preferred shares outstanding: YLO.PR.A & YLO.PR.B, which are subject to forcible conversion into old common, and YLO.PR.C & YLO.PR.D, which are not.

Issue Comments

REI.PR.A, REI.PR.C: Distributions 62% Return of Capital in 2011

This post is motivated by a query from Assiduous Reader adrian2, who writes in and says:

Is there any other Canadian security calling itself preferred and distributing ROC?

As it turns out, there is: REI.PR.A and REI.PR.C are reported by RioCan to have the following breakdown of their distribution in 2011:

  • Capital Gain: 1.72%
  • Foreign Non-Business Income 4.57%
  • Other Income 31.24%
  • Return of Capital 62.47%

Various implications of this kind of tax treatment were discussed by Tom Kiladze in the Globe:

In RioCan’s case, distributions will be taxed as income, not as dividends. That matters, because income is taxed at a higher rate. But the preferred units will be treated just like RioCan’s regular trust units, so a portion of the distributions will be treated as a return of capital. REITs often distribute more than their net incomes because depreciation skews their bottom lines (property values usually go up, not down), and the amount overpaid allows investors to get a better tax treatment.

BMO analyst Karine MacIndoe ran the numbers and found that RioCan has a historical five-year tax-deferral average of about 50 per cent. Applying that figure over a five-year horizon in the future, the pref units’ 5.25 per cent yield equates to a 4.82 per cent dividend yield on an after-tax return basis.

What the numbers will look like in the future is left as an exercise for the student.

Issue Comments

BAF placed on Review-Negative by DBRS

DBRS has announced that it:

placed the ratings of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant or the Company) Under Review with Negative Implications. DBRS is reassessing the risks associated with the Company’s transformational strategy (including the magnitude and pace of capital requirements) while returns from this investment remain difficult to forecast and pressure on operating income/cash flow from traditional business lines persists.

Bell Aliant is currently in the process of transforming its business by supplanting its traditional voice with broadband and IPTV services. Although DBRS recognizes the merits of such a strategy, it acknowledges that the transition will not be without risk. The Company expects to have invested approximately $500 million in Fibre-to-the-Home (FTTH) by the end of 2012. As of June 30, 2012, Bell Aliant has achieved 582,000 homes passed and penetration of approximately 75,000 FibreOP Internet customers and 65,000 FibreOP TV subscribers. In the meantime, revenues from local and long distance continue to decline at a steady pace (down 5.0% and 10.8% year-over-year, respectively, for H1/2012). As a result, Bell Aliant’s total EBITDA declined by 1.1% to $655 million for the first half of 2012 compared to the same period in 2011, a moderation of a negative trend that began in 2010. The decline was softened due to incremental revenues and operating income from the Company’s FibreOp services.

Bell Aliant maintains significant capital investment requirements in the near-to-medium term in order to achieve its stated objective of reaching one million homes passed. DBRS believes there are strategic merits to accelerating the Company’s capex program in order to advance their position in an increasingly competitive environment. That said, an acceleration of investment would increase external funding requirements as DBRS expects the Company to generate negative free cash flow after dividends over the period of accelerated capital investment.

In its review, DBRS will focus on Bell Aliant’s prospects for penetration growth in the new business lines, size/pace of capital program and overall financing requirements in light of Management’s commitment to its dividend. DBRS will also reassess the competitive environment, including pricing strategies and the threat of product innovation. DBRS will aim to complete its assessment and resolve the Under Review status within the next month.

In terms of short-term debt, Bell Aliant’s Commercial Paper rating of R-1(low) reflected the Company’s superior liquidity strength as entities with a long-term rating of BBB (high) are typically coupled with a short-term rating of R-2 (high). As part of our assessment of the future capital program and financing requirements, DBRS will also review the appropriateness of having a Commercial Paper rating on Bell Aliant that exceeds the standard mapping.

The text of press release doesn’t mention their preferred share issuing arm, Bell Aliant Preferred Equity Inc., specifically, but its preferred shares are specifically placed under Review-Negative in the appended table.

Bell Aliant Preferred Equity Inc. has two issues outstanding: BAF.PR.A and BAF.PR.C. Both are FixedResets, both are relegated to the Scraps index on credit concerns.

Issue Comments

New Issue: AX.PR.A FixedReset 5.25%+406

Artis REIT announced on July 24:

a marketed public offering (the “Financing”) of approximately $50 million Cumulative 5-Year Rate Reset Preferred Trust Units, Series A (the “Series A Units”) at a price of $25 per Series A Unit. The Financing is being led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Artis has also granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase additional Series A Units, up to an amount equal to 15% of the number of Series A Units sold pursuant to the Financing. The Financing will be priced in the context of the market with the final terms of the Financing to be determined at the time of pricing.

The Series A Units will pay fixed cumulative preferential distributions, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, for the initial approximately five-year period ending September 30, 2017. The first quarterly distribution, if declared, shall be payable on September 30, 2012. The distribution rate will be reset on September 30, 2017 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and a spread which will be set upon pricing of this Financing. The Series A Units are redeemable by Artis, at its option, on September 30, 2017 and on September 30 of every fifth year thereafter.
Holders of Series A Units will have the right to reclassify all or any part of their Series A Units as Cumulative Floating Rate Preferred Trust Units, Series B (the “Series B Units”), subject to certain conditions, on September 30, 2017 and on September 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement). Holders of Series B Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread which will be set upon pricing of this Financing.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated June 15, 2012. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

Artis continues to enjoy a strong deal flow pipeline, with a continued focus on the accretive acquisition of quality commercial properties, in select markets in Canada and the U.S.

The issue was priced the following day:

announced today that is has priced its previously announced marketed public offering (the “Financing”) of Cumulative 5-Year Rate Reset Preferred Trust Units, Series A (the “Series A Units”). Artis will issue 3 million Series A Units at a price of $25 per Series A Unit for gross proceeds to Artis of $75,000,000.

The Financing is being led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Artis has also granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase up to an additional 450,000 Series A Units.

The Series A Units will pay fixed cumulative preferential distributions of $1.3125 per unit per annum, yielding 5.25% per annum, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, for the initial approximately five-year period ending September 30, 2017. The first quarterly distribution, if declared, shall be payable on September 30, 2012 and shall be $0.2122 per unit, based on the anticipated closing of the offering of Series A Units of August 2, 2012. The distribution rate will be reset on September 30, 2017 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.06%. The Series A Units are redeemable by Artis, at its option, on September 30, 2017 and on September 30 of every fifth year thereafter.

Holders of Series A Units will have the right to reclassify all or any part of their Series A Units as Cumulative Floating Rate Preferred Trust Units, Series B (the “Series B Units”), subject to certain conditions, on September 30, 2017 and on September 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement). Holders of Series B Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread of 4.06%.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated June 15, 2012. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about August 2, 2012 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to fund future acquisitions, repay indebtedness, and for general trust purposes.

Artis continues to enjoy a strong deal flow pipeline, with a continued focus on the accretive acquisition of quality commercial properties, in select markets in Canada and the U.S.

And they announced on August 2:

it has closed its previously announced marketed public offering (the “Financing”) of Cumulative 5-Year Rate Reset Preferred Trust Units, Series A, (“the Series A Units”), through a syndicate of underwriters led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Pursuant to the Financing, Artis issued 3.0 million Series A Units at a price of $25 per Series A Unit for gross proceeds to Artis of $75,000,000.

Artis has granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase up to an additional 450,000 Series A Units.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

According to the prospectus supplement (available at SEDAR dated July 25, 2012; I am not permitted to link to it directly due to the cosy little contract the soon-to-be-bank-owned CDS has signed with regulators), “The Series A Units and the Series B Units are not rated by any rating agency.” Accordingly, the issue will not be tracked by HIMIPref™. As I have stated so often that people are getting sick of the repetition, this policy is not because I don’t think I can analyze the credit quality myself, and not because I worship the rating agencies … but because a public credit rating serves as a useful public flash-point during times of stress. It’s always useful to give the directors something to talk about over lunch!

Taxation is complicated: “Artis’ income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.” In 2011, Unitholder distributions were 100% return of capital and this was also the case in 2010.

Issue Comments

TA Downgraded to P-3 by S&P

Standard and Poor’s has announced:

  • We are lowering our long-term corporate credit and senior unsecured debt ratings on TransAlta Corp. to ‘BBB-‘ from ‘BBB’.
  • We are also lowering our global scale preferred stock rating on the company to ‘BB’ from ‘BB+’, and our Canada scale rating to ‘P-3’ from ‘P-3(High)’.
  • The cash flow related to a recently announced contract at TransAlta’s Centralia facility largely falls outside of our rating horizon; as a result, the positive impacts of an improved business risk profile and associated cash flows have a small impact on our analysis.
  • As we said in our research update from July 23, 2012, the recent arbitration decision on Sundance Units 1 and 2 increased the probability of a downgrade because it increases the business risk related to an additional 2.5 gigawatts of capacity sold under similar power purchase agreements and it led to additional deterioration in the company’s financial risk profile.
  • The stable outlook reflects our view that adjusted funds from
    operations-to-debt will remain in the 15%-20% range, below the 20% threshold we associated with the previous ratings.

The ratings on TransAlta reflect Standard & Poor’s opinion of the company’s strong business risk profile and significant financial risk profile. In our view, the business risk profile reflects a predominance of long-term power purchase arrangements (PPAs) and a relatively diversified electricity generation portfolio. We believe that offsetting these credit strengths are high leverage; the potential for year-to-year volatility in cash flow due to revenue exposure to volume and price risk; asset concentration at Centralia, TransAlta’s largest merchant asset; and the company’s involvement in high-risk energy trading activities. An underlying level of profitability and cash flow stability comes from long-term power contracts (with a minimum of five years to maturity).
…
The stable outlook reflects our expectation of AFFO-to-debt remaining in the 15%-20% range and a relatively stable business risk profile. We could raise the ratings if TransAlta improves its business risk profile or if we expect the company to achieve and maintain AFFO-to-debt of more than 20%. Conversely, while we don’t expect it, a material debt-financed acquisition or capital building program, costly regulatory or environmental initiatives, or a sustained deterioration in plant operating performance leading to AFFO-to-debt falling below 15% could result in a downgrade.

TransAlta currently has two preferred share issues outstanding, TA.PR.D and TA.PR.F, both FixedResets.

DBRS recently put TA on Review-Developing:

DBRS has today placed the BBB Unsecured Debt/Medium-Term Notes and Pfd-3 Preferred Shares ratings of TransAlta Corporation (TAC or the Company) Under Review with Developing Implications. This rating action follows the announcement of the final outcome of the arbitration case regarding the force majeure and economic claim of Sundance 1 and 2 coal-fired generation units. The arbitrator concluded that, although the closure was a result of a force majeure, Sundance 1 and 2 can still be economically restored to service. As a result of this outcome, TAC will be responsible for approximately $190 million in estimated repair costs to restart Sundance 1 and 2, as well as for $150 million in accrued penalties to TransCanada PipeLines Limited (TCPL; rated “A” by DBRS), a wholly owned subsidiary of TransCanada Corporation. However, TAC will still be receiving capacity payments totaling approximately $100 million from the Balancing Pool (established by the Government of Alberta) from today to when the units are restored to service, which is expected to be in the fall of 2013. Therefore, the net cash cost for TAC is estimated to be approximately $240 million.
…
DBRS expects TAC to ultimately fund the majority of the aforementioned costs primarily with equity (including preferred shares and dividend re-investment proceeds) in a timely manner to maintain its current leverage level. Any further increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating.

Issue Comments

LSC.PR.C Redeemed on Schedule

Scotia Managed Companies has announced:

The Board of Directors of Lifeco Split Corporation Inc. (“Lifeco”) has announced today that the redemption prices for all outstanding Capital Shares and Preferred Shares to be paid on July 31, 2012 are as follows:
Redemption Price per Preferred Share: $36.84
Redemption Price per Capital Share: $4.4466

Holders of 27,010 Capital Shares requested delivery of and will receive their pro rata share of portfolio shares in payment for their Capital Shares.

Capital Shares and Preferred Shares of Lifeco are listed for trading on The Toronto Stock Exchange under the symbols LSC and LSC.PR.C respectively. The Capital Shares and Preferred Shares will be de-listed from The Toronto Stock Exchange as at the close of trading on July 31, 2012.

The maturity was previously discussed on PrefBlog. LSC.PR.C was not tracked by HIMIPref™.

Issue Comments

S&P: Outlook Negative on BNS, LB, NA, RY & TD

Standard & Poor’s has announced:

it has revised its outlooks on seven Canadian financial institution ratings to negative from stable. The financial institutions are:

  • The Bank of Nova Scotia
  • Central 1 Credit Union
  • Home Capital Group Inc.
  • Laurentian Bank of Canada
  • National Bank of Canada
  • Royal Bank of Canada
  • Toronto-Dominion Bank

At the same time, Standard & Poor’s affirmed its ratings on all seven banks.
…
The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada. A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks. Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.
…
The negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization generally, associated with consumer debt burdens proving excessive in an unfavorable economic scenario, or due to competitive pressures amplified by the shift to a consumer deleveraging phase.

Over the past decade, Canadian consumer credit market debt (including residential mortgage loans and consumer credit) has risen to more than 150% from 110% of disposable income, and relative to GDP, consumer debt has increased to more than 90% from about 70%. Over the same period, Canadian house prices have approximately doubled, with compounded real growth in housing prices estimated to be about 5% per year.
…
Bank risk profiles have benefited from Canadian banks’ underwriting practices, stable performance metrics for banks’ credit portfolios, and the sharing of mortgage risk between the banks, the borrowers (extensively based on full recourse to the consumer), and the providers of mortgage insurance, notably the Canada Mortgage and Housing Corporation (AAA/Stable/A-1+). In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.

Systemic factors are incorporated in Standard & Poor’s rating methodology primarily through its Banking Industry Country Risk Assessment, or BICRA. The BICRA framework takes into account economic and institutional risk factors present in the environment in which banks operate. Canada’s BICRA is currently set at ‘1’ (lowest risk) on a 1 to 10 scale. The BICRA component of the analysis is intended to highlight emergent systemic risks that may not be fully apparent when viewing the sector at the level of individual banks.

The following preferred shares of the affected banks are outstanding:

BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PT.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z.

LB.PR.D, LB.PR.E.

NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P.

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y.

TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.Y.

Issue Comments

NXY Placed on Review-Positive by S&P

Standard & Poor’s has announced:

  • CNOOC Ltd. (AA-/Stable/–; cnAAA/–) has agreed to acquire Nexen Inc. in a transaction valued at about C$19.4 billion, including assumption of
    debt.

  • We are placing our ratings, including our ‘BBB-‘ long-term corporate credit rating, on Nexen on CreditWatch with positive implications.
  • The CreditWatch placement reflects the potential that we might raise our ratings on the company to match CNOOC’s stand-alone credit profile of ‘a’ upon the transaction’s completion.
  • We expect to resolve the CreditWatch placement before the end of 2012.

S&P also announced:

that the rating on China-based CNOOC Ltd. (AA-/Stable/–; cnAAA) is not immediately affected by the company’s proposed acquisition of Nexen Inc. (BBB-/Watch Pos/–). In our view, the US$15.1-billion acquisition is larger than previous CNOOC deals in recent years and could test the company’s integration ability.

Standard & Poor’s sees the acquisition as consistent with CNOOC Ltd.’s strategy to expand outside China. The transaction, once completed, would increase CNOOC Ltd.’s proven reserves by about 30% and production by about 20%. More importantly, it provides a good opportunity for CNOOC Ltd. to diversify its operations materially in the low-risk member countries of the Organization for Economic Cooperation and Development (OECD). At the end of 2011, more than 71% of CNOOC Ltd.’s reserves are off the coast of China, and over 20% of reserves are in countries with high sovereign risks. After the acquisition, CNOOC Ltd.’s reserves in China will fall to 56% and its reserves in OECD countries would increase to above 28%.

NXY has issued a single preferred share issue, NXY.PR.A, which is tracked by HIMIPref™.

Issue Comments

PDV.PR.A Downgraded by DBRS

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Prime Dividend Corp. (the Company) to Pfd-3 from Pfd-3 (high).

In November 2005, the Company issued 2.2 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued was originally December 1, 2012, but was extended to December 1, 2018, after holders of 96.1% of Class A Shares and 90.2% of Preferred Shares voted in favour of the extension.

The Company holds a portfolio consisting primarily of common shares (the Portfolio) of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., IGM Financial Inc.) and a few other companies (BCE Inc., TransAlta Corporation, TransCanada Corporation, Power Financial Corporation, TSX Group Inc.). The common shares of each Portfolio company represent between 4% and 8% of the total NAV of the Company, and no more than 20% of the NAV of the Company may be invested in securities issued by financial services or utilities firms other than those listed above. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay to each Preferred Share a monthly floating-rate distribution equal to the prevailing prime rate in Canada (the Prime Rate) plus 0.75% per annum, with a minimum of 5% per annum and maximum of 7% per annum. Holders of Class A Shares are targeted to receive a monthly floating-rate distribution equal to the Prime Rate plus 2% per annum, with a minimum targeted rate of 5% per annum and a maximum targeted rate of 10% per annum. Holders of the Preferred Shares have been receiving the minimum monthly payment of $0.04167 per share (yielding 5% per annum) since November 2008.

On September 6, 2011, DBRS confirmed the ratings on the Preferred Shares at Pfd-3 (high) based on the sufficient level of downside protection available to holders of the Preferred Shares at the time. The NAV was fairly volatile in the months following the rating confirmation, with downside protection falling to 39.7% in November 2011 before recovering slightly over the first quarter of 2012. Since April 2012, the NAV declined again, dropping to $15.89 as of June 29, 2012. The current dividend coverage ratio is around 0.87 times and the downside protection available is approximately 37.1%, which fails to reach levels commensurate with a Pfd-3 (high) rating. As a result of the insufficient downside protection and dividend coverage ratio on the Portfolio, the Preferred Shares have been downgraded to Pfd-3 from Pfd-3 (high).

PDV.PR.A was last mentioned on PrefBlog in connection with its outstanding warrants. PDV.PR.A is not tracked by HIMIPref™, as there are only about 1.5-million of the $10-par-value shares outstanding.

Issue Comments

FTS: DBRS Confirms, Removes "Review Developing"

DBRS has announced that it:

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.).

The acquisition of CH Energy Group caused S&P to place FTS on Review-Negative but that review was resolved in May:

  • We are affirming our ratings, including our ‘A-‘ long-term corporate credit rating, on Fortis Inc. and subsidiary FortisAlberta Inc.
  • We are also removing the ratings from CreditWatch with negative implications, where they were placed Feb. 22, 2012.
  • The affirmation reflects Fortis’ financing plan for the proposed C$1.5 billion acquisition of CH Energy Group Inc. and the completion of its C$900 million Waneta hydroelectric construction project, on time and on budget in 2015.
  • We expect that the company’s diversified portfolio should generate adequate and stable cash flow at or above our consolidated targets.
  • The stable outlook reflects our assessment of the operating companies’ underlying operational and financial stability, which mitigates the relatively weak financial measures for the ratings.

Fortis has a number of preferred shares outstanding: FTS.PR.C, FTS.PR.E, FTS.PR.F, FTS.PR.G and FTS.PR.H.