DBRS Upgrades Fortis Inc. to A (low)

DBRS has today upgraded the ratings of Fortis Inc. (Fortis or the Company) to A (low) and Pfd-2 (low) from BBB (high) and Pfd-3 (high), respectively. The trends have been changed to Stable from Positive.

The upgrade is driven by the Company’s low business risk profile (benefiting from its ownership of a diversified basket of utility businesses, which provide over 90% of consolidated EBITDA), its reasonable credit metrics (which have improved modestly over the years), the significant reduction in external debt at subsidiary Terasen Inc., and the Company’s demonstrated ability to acquire and integrate stable utility businesses financed on a conservative basis.

Fortis benefits from its ownership of diversified utility investments, with electric utilities providing approximately 56% of EBITDA and gas utilities, 36%. Several of Fortis’s utility subsidiaries operate in favourable regulatory environments, which in 2009 experienced a number of positive regulatory decisions that led to an increase in allowed return on equity (ROE) and in the deemed equity component. These regulatory regimes are supportive for Fortis’s consolidated capital program, which over the next five years is expected to approach $5 billion, with approximately 70% of capital spending incurred at the regulated electric utilities (mainly FortisAlberta and FortisBC Inc.) and 27% at the regulated gas utilities. 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 (expected to average $100 million annually for the next five years). This will be used to fund capital build-out programs, while the subsidiaries will maintain their respective regulated capital structures. DBRS views the level of equity injections to be made by Fortis as reasonable, and does not anticipate that the Company will use debt to fund the injections, thereby avoiding double leverage. Therefore, these capital programs should not have an impact on the Company’s strong financial and operating performance. DBRS notes that the utility subsidiaries continue to execute on their respective capital expenditure programs and, as a result, have increased their asset and earnings bases.

At the time of our last review in June 2010, when the trends were changed to Positive, DBRS stated that it would consider an upgrade of Fortis’s ratings if the Company continued to exhibit strong financial and operating performance and as long as its operating subsidiaries would not suffer any material negative regulatory action in the near future or pursue any mergers and acquisitions activity financed on an aggressive basis.

DBRS has also upgraded the ratings of indirect subsidiary FortisBC Inc.’s Secured Debentures and Unsecured Debentures to A (low) from BBB (high), maintaining the trends at Stable (see separate press release).

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on the DBRS website under Methodologies.