DBRS Confirms Fortis Inc. at A (low), Pfd-2 (low), Stable Trends

DBRS has today confirmed the Unsecured Debentures and Preferred Shares ratings of Fortis Inc. (Fortis or the Company) at A (low) and Pfd-2 (low), respectively, both with Stable trends. The confirmation is based on the Company’s strong financial profile and low business risk profile, driven by its diverse ownership of regulated electric and gas operating subsidiaries that collectively represent approximately 91% of consolidated EBITDA and assets.

In May 2011, Fortis entered into a Merger Agreement with Central Vermont Public Service Corporation (CVPS) to purchase 100% of the common shares of CVPS for total consideration of approximately US$700 million, including the assumption of approximately US$230 million in debt. Subsequently, CVPS’s Board of Directors received a competing acquisition proposal from Gaz Métro Limited Partnership and deemed it superior to Fortis’s offer. CVPS terminated the Merger Agreement with Fortis and paid Fortis US$17.5 million plus US$2.0 millions in expenses. DBRS had confirmed Fortis’s ratings following the announcement of its intention to acquire CVPS. The subsequent termination of the acquisition does not impact ratings.

In 2010, Fortis entered into a partnership with Columbia Power Corporation and the Columbia Basin Trust (CPC/CBT), both entities of the Government of British Columbia, to construct the 335 MW Waneta Expansion at an estimated cost of approximately $900 million. Fortis owns a controlling 51% interest in the Waneta Expansion and will operate and maintain it when it comes into service, which is expected in spring 2015. Fortis issued common shares in June 2011 for gross proceeds of $345 million. The net proceeds will be used to repay indebtedness outstanding under the Company’s committed credit facility, to finance additional equity injections into the Company’s western Canadian regulated utilities and the non-regulated Waneta Expansion Limited Partnership. The common equity issuance has further improved Fortis’s capital structure.

DBRS commented earlier this year following the announcement by the Government of Belize passing legislation and issuing an order to expropriate the Company’s ownership interest in Belize Electricity Limited (BEL) and dismissing its board of directors. While uncertainties remain regarding the amount of compensation to be paid to Fortis and possible legal proceedings, any consequences are not expected to affect Fortis’s credit profile or ratings, given BEL’s very modest size (less than 2% of Fortis’s total assets). Furthermore, from a holding company perspective, BEL has not provided dividends to Fortis in a number of years.

Fortis’s low business risk is due to its diversified utility investments, with electric utilities providing approximately 55% of EBITDA and gas utilities 36%. Fortis’s credit metrics are strong on both a consolidated and non-consolidated basis. The Company has witnessed a modest improvement over the years as a result of its utility subsidiaries adding new assets into rate base, an increase in rates and favourable regulatory decisions.

Over the next five-year period from 2011 through 2015, Fortis’s consolidated capital program is expected to approach $5.7 billion, with approximately 61% of capital spending incurred at the regulated electric utilities (mainly FortisAlberta and FortisBC), 23% at the regulated gas utilities and 16% at the non-regulated operations. Capital expenditures at the regulated utilities are subject to regulatory approval. It is anticipated that the majority of capital expenditures will be funded at the subsidiary level, with a combination of internally generated cash, operating company-level debt and equity from Fortis to fund capital build-out programs, while maintaining their respective regulated capital structures. DBRS views the level of Fortis’s equity injections as reasonable, and does not anticipate that the Company will use debt to fund the injections, thereby avoiding double leverage.

Note:
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.