June 17 (Reuters) - (The following statement was released by the rating agency)
Based on its initial review of the provisions included in the approved merger between CH Energy Group and Fortis, Fitch Ratings believes that Central Hudson Gas & Electric (CHG&E) should be able to maintain its stable credit profile.
As part of the merger agreement, CHG&E would write off existing deferred regulatory assets and create a regulatory liability totaling $35 million. The company would also be required to contribute $5 million to a community benefit fund. CHG&E would also guarantee a total of $9.25 million ($1.85 million annually) of synergy savings to be returned to customers over the first five years after closing. In addition, CHG&E’s rates would be frozen through July 1, 2015.
To offset those costs, Fortis committed to provide CHG&E a cash payment of $40 million and to invest $215 million over the next two years. The funds would be used only for expenses for which recovery is authorized by the New York Public Service Commission (NYPSC). Fitch believes that Fortis’ cash infusion mitigates near-term financial pressure and supports CHG&E’s cash flow stability and capital structure. Fitch expects bonus depreciation to further enhance CHG&E’s operating cash flows in 2013.
Fitch’s main concern is the rate freeze. CHG&E’s current multi-year rate plan (expiring June 30, 2013) would be extended two years and will require effective management of operating costs and CapEx during the rate freeze period in order to maintain financial stability.
The terms of the approval include several bondholder protection features that are supportive of CHG&E’s credit quality and mitigate increased business risk, in Fitch’s view. The features include, among others:
--A ban on cross-default provisions and guarantees or financial support to Fortis;
--A commitment to continue to operate CHG&E as a stand-alone entity; and
--A restriction on payment of common dividends if the company fails to maintain a minimum common equity ratio.
Fitch considers CHG&E’s credit metrics to be supportive of the current rating category. For the latest twelve months ended March 31, 2013, the ratios of FFO/interest and FFO/debt were 5.3x and 25.9%, respectively. CHG&E has adequate liquidity with access to a total of $150 million under a bank credit facility that matures in October 2016.
Fitch expects to complete a full rating review of the credit after a written order by the NYPSC is released.