DBRS Removes Fortis Inc. from Under Review with Developing Implications and Confirms Ratings at A (low) and Pdf-2 (low), Stable Trends

DBRS Limited (DBRS) has today removed the A (low) Issuer Rating, A (low) Unsecured Debentures and Pfd-2 (low) Preferred Shares ratings of Fortis Inc. (Fortis, the Parent or the Company) from Under Review with Developing Implications and has confirmed the ratings as listed above with Stable trends. This action follows the completion of the Company’s acquisition of UNS Energy Corporation (UNS) (the Acquisition) and the conversion of $1.8 billion of convertible debentures into common equity in late October 2014.

DBRS believes that the Acquisition has slightly increased Fortis’ business risk profile, as the business risk of UNS is viewed as modestly higher than Fortis’ average business risk, partially offset by an improvement of diversified sources of cash flow. With the Acquisition, approximately 93% of 2015 non-consolidated earnings will be generated from regulated utilities (90% in 2013), with the remaining earnings coming from hotel properties and long-term contracted non-regulated generation. DBRS has assessed the regulatory regime in Arizona and is of the view that it is modestly weaker when compared to other jurisdictions in Canada where Fortis currently conducts its business, reflecting regulatory lag in Arizona. However, DBRS does recognize that the regulatory framework in Arizona has improved lately. In DBRS’s view, the overall business risk profile of Fortis’ investment portfolio should remain in the A (low) range following the completion of the Acquisition.

Fortis’ financing of the USD 2.5 billion Acquisition was consistent with DBRS’s expectation. Fortis issued $1.8 billion in convertible debentures, approximately $600 million in preferred shares and the remaining portion in debt. Most of the convertible debentures were converted into common equity in late October 2014. As a result, the financial risk profile on a non-consolidated basis remains consistent with DBRS’s expectation, with all pro forma non-consolidated credit ratios improving from 2013. Fortis’ non-consolidated debt in the capital structure would remain within DBRS’s 20% guideline for holding company notching while all other key credit metrics would solidly remain within the current rating range.

Fortis is required to commit approximately $100 million in equity to the hydro Waneta Expansion Project in 2015 (the WEP). This equity requirement is within Fortis’ financing capability and would not have any material impact on its financial profile. The WEP is expected to be completed on schedule and within budget in spring 2015. Upon completion of the WEP, DBRS expects incremental cash flow to Fortis to further support its financial metrics.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), Rating Holding Companies and Their Subsidiaries (January 2014) and DBRS Criteria: Rating Preferred Share and Hybrid Criteria for Corporate Issuers (December 2014), which can be found on the DBRS website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.