DBRS Confirms Fortis Inc. at BBB (high) and Pfd-3 with Stable Trends

DBRS Limited (DBRS) has today confirmed the following ratings of Fortis Inc. (Fortis or the Company): the Issuer Rating at BBB (high), the Unsecured Debentures rating at BBB (high) and the Preferred Shares rating at Pfd-3 (high). All trends are Stable. The confirmations reflect DBRS’s view that (1) the business risk profile improved following the acquisition of ITC Holdings Corp. (ITC; the Acquisition) and has remained stable since the Acquisition and (2) the Company’s consolidated metrics, although weaker than pre-Acquisition levels, remained strong for the current ratings. The Stable trends reflect the fact that the Company’s non-consolidated metrics, which significantly weakened immediately following the Acquisition, are expected to improve modestly over the medium term as a result of full-year cash flow contributions from ITC.

Based on DBRS’s review of the Company’s 2016 financial performance, particularly the performance of ITC since the Acquisition and the good progress made toward its full integration into Fortis’s system, DBRS maintains the view that the acquisition of ITC modestly improves Fortis’s business risk profile. With the addition of ITC, Federal Energy Regulatory Commission (FERC) transmission assets account for approximately 29% of identifiable regulated assets (excluding goodwill). ITC also provides Fortis with opportunities to grow its transmission assets over the next few years with a number of FERC-approved projects. Fortis’s consolidated capital expenditures, mostly in the regulated business, are estimated to be approximately $3.0 billion in 2017, which should prompt solid growth in the regulated rate base. Finally, the Acquisition will significantly increase the size and scale of Fortis’s operations and diversify the base cash flow to Fortis. Total post-Acquisition assets increased to approximately $48 billion (97% regulated) from approximately $30 billion (94% regulated) pre-Acquisition. The total consolidated mid-year rate base, which excludes the Waneta Expansion, increased from approximately $16.5 billion as at September 30, 2016, to approximately $23.5 billion as at December 31, 2016, post-acquisition of ITC. This makes Fortis one of the largest holding companies of regulated assets in North America.

From a consolidated financial profile perspective, most key credit metrics remained strong for the current ratings as at the end of 2016, except for the lower consolidated cash flow-to-debt, which reflected a partial-year cash flow contribution from ITC. All of the Company’s 2017 consolidated metrics, on a pro forma basis, will benefit from a full-year cash contribution from ITC; as such, they are all expected to remain supportive of the current ratings. Based on DBRS’s rating approach to holding companies, DBRS recognizes that Fortis is a holding company of large, diverse and stable cash flow–generating regulated assets. This partially mitigates the structural subordination issue. However, the incremental debt resulting from the Acquisition far outweighs the incremental cash flow to Fortis. As a result, non-consolidated metrics in 2016 weakened compared with 2015 levels, with the debt-to-capital ratio increasing to nearly 30.0% from 23.5% in 2015 and the cash flow-to-debt ratio declining to just over 10% from 18% in 2015 (partly reflecting 1.5 months of cash distributions from ITC). DBRS expects the non-consolidated cash flow-to-debt ratio to improve over the medium term as Fortis will benefit from a full-year of cash contributions from ITC and stronger cash flows from all other regulated subsidiaries. DBRS expects Fortis to maintain its non-consolidated debt-to-capital at below 30% and non-consolidated cash flow-to-debt at around 15% on a sustainable basis. DBRS notes that the Company’s post-Acquisition common equity of approximately $500 million was issued in March 2017, with the proceeds being used to repay short-term borrowings, which supports its credit metrics. DBRS recognizes that all capital expenditures over the medium term will occur at regulated utilities and will be mostly financed by the Company’s subsidiaries.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry; DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries; and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.