DBRS Places Gaz Metro inc. FMB Rating Under Review with Developing Implications, Confirms CP Rating

DBRS has today placed the “A” First Mortgage Bonds rating of Gaz Métro inc. (GMi) Under Review with Developing Implications. This action follows the announcement by Gaz Metro Limited Partnership (GMLP, the guarantor of GMi’s First Mortgage Bonds) that it has, through its U.S. subsidiary, Northern New England Energy Corporation (NNEC), submitted an offer to the board of directors of Central Vermont Public Service Corporation (CV) to acquire all of CV’s outstanding common shares for US$35.25 per share (the Transaction). GMi’s Commercial Paper rating has concurrently been confirmed at R-1 (low) with a Stable trend.

DBRS estimates the total value of the Transaction to be approximately US$702 million, comprising approximately US$472 million to acquire CV’s equity and US$230 million of CV debt. GMLP’s bid price of US$35.25 is slightly higher than the recent US$35.10 per share offer made by Fortis Inc. (Fortis, rated A (low), Stable) to CV on May 30, 2011. The Transaction is considered material for GMLP (approximate Transaction value of US$702 million versus GMLP total assets of $3.6 billion as of March 31, 2011).

CV, the largest integrated electric utility in Vermont, purchases, produces, distributes and sells electricity to approximately 160,000 customers in Vermont. CV also holds (directly and indirectly) an approximate 40% interest in Vermont Transco LLC (Transco), the high-voltage transmission system in Vermont. As of March 31, 2011, CV had total assets of US$700 million (of this, the Transco investment was approximately $170 million). CV is slightly larger than Green Mountain Power (GMP), the second-largest electric utility in Vermont, which GMLP (through NNEC) acquired in 2006 (GMP had total assets and total debt of approximately US$594 million and US$186 million as of March 31, 2011). GMLP’s objective is to merge CV and GMP into an electric utility serving the large majority of the electric customers in the state of Vermont, with the combined utility expected to provide ratepayer savings through efficiency gains and cost savings.

DBRS views the addition of CV and merger with GMP as potentially positive in a number of areas, including the following: (1) increased geographic, regulatory and energy (electric versus gas) diversification (DBRS estimates that on a simple pro forma basis, the combined CV-GMP would comprise approximately one-third of GMLP’s consolidated cash flow); (2) CV is a rate-regulated utility with a reasonable allowed return on equity and capital structure, which should provide stable business and financial risk profiles; (3) GMLP, through GMP as well as GMLP’s ownership of Vermont Gas Systems (a small Vermont-based natural gas utility), has significant experience operating in the Vermont regulatory environment; (4) potential for synergies flowing from a combination of GMP and CV; (5) a potential source of regulated growth, largely through what would become CV-GMP’s majority ownership position in Transco.

While DBRS sees a number of positives in the Transaction as noted above, the ratings have been placed Under Review with Developing Implications pending a review of a number of items, including the following: (1) details on the intended funding of the Transaction, particularly the use of debt to fund a portion of the acquisition cost (GMLP has stated that the CV equity purchase will be funded on a 50% equity/50% debt basis, implying an approximate overall equity/debt structure (including CV’s debt) on the total Transaction of 35%/65%, which is slightly above GMLP’s current 60% consolidated leverage). GMLP stated it has commitments for a bridge facility that may be used to fund the full requirements of the Transaction, pending the arrangement of more permanent funding; (2) the expected impact on GMLP’s consolidated and non-consolidated credit metrics; (3) a review of the potential synergistic benefits and any savings that may accrue to the combined CV-GMP; (4) the financial impact of the proposed granting to a public trust of 30% of CV-GMP’s ownership interest in one of Transco’s parent entities, Vermont Electric Power Company; and (5) the general uncertainty and potential future developments since this is a competing bid for CV.

The Commercial Paper rating has been confirmed given the Under Review with Developing Implication status of the First Mortgage Bonds rating and the expectation of a strong liquidity position being maintained as GMi and GMLP have done historically.

The Transaction would be subject to acceptance by CV and state and regulatory approvals. GMLP estimates potential closing in eight to 12 months.

Notes:
The First Mortgage Bonds are guaranteed by Gaz Metro Limited Partnership.

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, which can be found on our website under Methodologies.