Mr. Eric Eng of DBRS reports

Debt rated:  issuer rating

Rating:  A (low)

Trend:  n/a

Rating action:  under review with negative implications

Debt rated:  unsecured debentures

Rating:  A (low)

Trend:  n/a

Rating action:  under review with negative implications

Debt rated:  preferred shares

Rating:  Pfd-2 (low)

Trend:  n/a

Rating action:  under review with negative implications

DBRS Ltd. has placed the A (low) issuer rating, the A (low) unsecured debentures rating and the Pfd-2 (low) preferred shares rating of Fortis Inc. under review with negative implications. This action follows the announcement that the company has agreed to acquire ITC Holdings Corp. for a total consideration of approximately $11.3-billion (U.S.), including the assumption of $4.4-billion (U.S.) of debt on closing. The rating action reflects DBRS's view that the acquisition will have a modestly positive impact on the company's business risk profile but a negative impact on its financial risk profile. The acquisition is expected to close in late 2016 and is subject to both Fortis and ITC shareholder approvals, as well as various regulatory and federal approvals.

Based on a preliminary review, DBRS views the acquisition as modestly positive to Fortis's business risk profile. ITC, as an electricity transmission company operating in eight states, is fully regulated by the Federal Energy Regulatory Commission and is allowed to earn above-average returns on investments based on a favourable equity component (60 per cent) in the capital structure. DBRS notes that the allowed returns and capital structure are both higher than Fortis's current portfolio of regulated utilities. ITC's tariffs are also calculated under a cost-of-service methodology with an annual true-up mechanism, resulting in no volume risk, and provide ITC with stable and predictable earnings and cash flows. The acquisition will additionally result in further geographic diversification for Fortis.

Fortis intends to finance the acquisition by issuing approximately (1) $3.5-billion (U.S.) to $3.9-billion (U.S.) of equity, largely satisfied through the share consideration to be paid to ITC shareholders, (2) $2.0-billion (U.S.) of debt, and by (3) selling 15.0 per cent to 19.9 per cent of ITC to minority investors for approximately $1.0-billion (U.S.) to $1.4-billion (U.S.). DBRS considers the current financing plan to be negative to the company's non-consolidated financial risk profile. Based on DBRS's pro forma 2015 calculations, Fortis had a non-consolidated debt-to-capital ratio of approximately 21.9 per cent and a non-consolidated cash-flow-to-debt ratio of 21.4 per cent. Based on the company's proposed financing plan and DBRS's estimate of future dividends from the acquisition assets to Fortis, DBRS expects a significantly negative impact on the company's non-consolidated metrics. As a result, DBRS believes that placing Fortis's ratings under review with negative implications is the appropriate rating action at this time.

DBRS will continue to review the final financing plan for the acquisition and will resolve the under review rating action once the transaction closes. The company's ratings could be downgraded by one notch if the non-consolidated debt-to-capital ratio following the acquisition is materially over the 20-per-cent threshold and the non-consolidated cash-flow-to-debt ratio is significantly below 20 per cent.

Notes:

All figures are in U.S. dollars unless otherwise noted.