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

DBRS Limited (DBRS) has today confirmed the A (low) Issuer Rating, A (low) Unsecured Debentures rating and Pfd-2 (low) Preferred Shares rating of Fortis Inc. (Fortis, the Parent or the Company) with Stable trends. This action is based on DBRS’s view of the Company’s financial performance to date in 2015 (YTD 2015). The confirmations reflect Fortis’ improved business risk profile following the completion of the Waneta Expansion hydro generation project (Waneta Expansion), no material changes in its regulated subsidiaries and its reasonable consolidated and non-consolidated financial profiles.

On April 1, 2015, the Company completed construction of the $900 million, 335 MW Waneta Expansion ahead of schedule and on budget. Fortis has a 51% controlling ownership interest in the Waneta Expansion, with Columbia Power Corporation and Columbia Basin Trust holding the remaining 49% interest. The Waneta Expansion contributed $17 million in earnings to the Corporation YTD 2015. The Waneta Expansion’s output will be included in the Canal Plant Agreement (an agreement between British Columbia Hydro & Power Authority (BC Hydro; rated AA (high)), FortisBC Inc. (FBC; rated A (low)) and three other parties governing 1,565 MW of capacity) and will receive fixed energy and capacity entitlements based on long-term average water flows. In the long-term energy purchase agreement with BC Hydro, approximately 630 gigawatt hours and associated capacity required to deliver such energy have been contracted. The remaining capacity, approximately 234 MW, will be sold to FBC under a long-term capacity purchase agreement. The completion of this project removed Fortis from risks associated with constructions such as cost overruns and delays. In addition, the completion of the $365 million sale of hotel assets in October 2015, which completed the divestitures of all Fortis Properties’ commercial real estate and hotel assets, reduced Fortis’ exposure to this higher-risk, non-regulated business.

Fortis’ regulated utilities’ risk profiles remained solid. Higher earnings contributions were received from all of its utilities in YTD 2015 except FortisBC Energy Inc. (FEI), which experienced a slight reduction in earnings due to the timing of regulatory flow-through deferred amounts and a decrease in the allowed return on equity (ROE) and equity component of the capital structure as a result of the amalgamation of FortisBC Energy Inc., FortisBC Energy (Vancouver Island) Inc., FortisBC Energy (Whistler) Inc., and Terasen Gas Holdings Inc. The quality of the regulatory frameworks in all jurisdictions remained generally supportive and reasonable, and is not expected to have material changes in the short-to-medium term (see Significant Regulatory Proceedings). DBRS notes that in Alberta, FortisAlberta Inc. (FAI) had a lower allowed ROE and lower deemed equity in 2015 (retroactive to 2014 and 2013) as a result of a regulatory decision in March 2015. However, the impact of this on FAI’s cash flow is expected to be very modest.

Fortis maintained reasonable consolidated and non-consolidated ratios in YTD 2015 and remained consistent with the current rating. These ratios are expected to improve by the end of 2015 and in the medium term since (i) $230 million non-consolidated debt was reduced after September 30, 2015, with proceeds from the sale of Fortis Properties; (ii) all regulated utilities are expected to maintain their leverage in line with the regulatory capital structure in their respective jurisdictions; and (iii) Fortis’ equity injection to its utilities is expected to be modest and manageable over the next few years.

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.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015), Rating Holding Companies and Their Subsidiaries (January 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.