DBRS Confirms Gaz Métro inc. at “A,” Removes from Under Review – Developing

DBRS has today confirmed the First Mortgage Bonds of Gaz Métro inc. (GMi) at “A” with a Stable trend and removed the rating from Under Review with Developing Implications, where it was placed on June 23, 2011, following the announcement that GMi’s subsidiary, Gaz Métro Limited Partnership (GMLP, the guarantor of GMi’s First Mortgage Bonds), had 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 $35.25 per share (the Transaction). DBRS estimates the total value of the Transaction to be approximately $756 million, comprising approximately $485 million to acquire CV’s equity, $231 million of CV debt and transaction and other costs of $40 million. At that time, the Commercial Paper rating was confirmed at R-1 (low) with a Stable trend.

DBRS noted in its June 23, 2011, press release that while the Transaction was potentially positive in a number of areas (see the press release for details), the rating was 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; (2) the expected impact on the consolidated and non-consolidated credit metrics of GMLP; (3) a review of the potential synergistic benefits and any savings that might accrue to the combined CV-Green Mountain Power entity; (4) the financial impact of the proposed granting to a public trust of 30% of CV-GMP’s ownership interest in one of the parent entities of Vermont Transco LLC, Vermont Electric Power Company (VELCO); and (5) the general uncertainty and potential future developments since this was a competing bid for CV.

Since the announcement was made, CV and GMLP have since signed an Agreement and Plan of Merger (the Merger Agreement). DBRS has concluded its review, which included a review of the Merger Agreement, discussions with GMi management and other due diligence items. Today’s confirmation notes the following with respect to the items listed above:

(1) and (2): The intended funding of CV’s equity purchase is expected to be done on a 50% equity/50% debt basis, which, on a pro forma basis, would marginally increase GMLP’s debt-to-capital ratio by approximately 2% (59% as of June 30, 2011). On a forward looking basis, DBRS estimates consolidated coverage metrics (EBITDA-to-interest and cash flow-to-debt) would be only modestly affected by approximately 0.2x and 2% respectively, remaining in line with GMLP’s business risk and the current “A” rating category. On a non-consolidated basis, the Transaction is expected to be cash positive for GMLP.

(3): The expected synergies and merger savings arising from a combination of Green Mountain Power and CV, estimated by GMi at $144 million over ten years, was reviewed and do not appear unreasonable.

(4): The granting of the 30% ownership interest in VELCO is not viewed as a material amount in the context of GMLP’s financial size.

(5): At the time GMi’s bid was made, CV had previously entered into a merger agreement with Fortis Inc. (Fortis). The CV-Fortis agreement has since been terminated, resulting in more clarity of the GMI-CV process.

DBRS notes that today’s confirmation assumes that if the Transaction closes, it will be on the terms, conditions and funding strategy currently envisioned. Although not expected, any material change such as to GMi’s funding strategy or any onerous conditions imposed by a regulatory body could result in DBRS’s reviewing the impact of a revised transaction on GMi’s ratings. Today’s confirmation incorporates our assumption that such a material change is unlikely.

The Transaction remains subject to approvals, including that of CV common shareholders and U.S. federal and Vermont regulators, and is expected to be completed in approximately nine to 12 months.

Notes:
All figures are in U.S. 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.