Fortis Leads Utilities to Biggest Monthly Gain Since 1998: Canada Credit

Fortis Inc. led Canadian utilities bonds to their biggest monthly gain since 1998 as the company benefited from regulatory changes that allowed it to pass higher prices onto consumers.

Fortis Alberta’s 4.99 percent bonds maturing in 2047 returned 7.9 percent last month, the best performance among 700 securities on the Bank of America Merrill Lynch Canadian Corporate Index. Merrill’s Canadian Utility Index returned 3.7 percent in August, the most in 12 years, compared with 2.3 percent for the broader Canadian Corporate Index.

The utility index’s overall yields fell last week to 3.97 percent, the lowest since at least December 1996, making it cheaper for Fortis and other companies to borrow. Fortis, Canada’s largest publicly traded power distribution utility, plans to borrow C$300 million ($285 million) to C$500 million annually in the next five years to help pay for a C$5 billion expansion plan, Chief Financial Officer Barry Perry said.

“It’s a fabulous time to be borrowing, and each of our utilities will be doing regular long-term debt issues in the next few years,” Perry said in a telephone interview yesterday from St. John’s, Newfoundland. “We are getting offers to sell 30- and 40-year debt around 5 percent. At these levels, we are going to get as much debt done as we can.”

By contrast, Fortis Alberta sold C$100 million in 30-year debt in February 2009 at 7.06 percent.

Epcor Utilities Inc., an Edmonton, Alberta-based power generator, and Toronto Hydro Corp., the city-owned utility, were among companies with bonds in the top 10 of the index’s largest winners last month. The index has 82 issues and a par value of about C$19.5 billion.

Tops U.S. Rivals

Utilities beat returns on the broad corporate index by 1.37 percentage points in August, the most since February 2009. Canadian utilities outperformed their U.S. counterparts, which gained 2.8 percent last month, a separate Merrill index shows.

Elsewhere in credit markets, the extra yield investors demand to own Canadian corporate rather than federal debt widened to 150 basis points, a four-week high, the Bank of America Merrill Lynch data showed. Spreads this year widened to as much as 154 basis points in June after narrowing to 114 basis points in March. Yields on corporate debt rose to 3.72 percent.

The spread on provincial bonds was unchanged at 60 basis points, a two-week high.

Armtec Infrastructure Income Fund’s Armtec Holdings unit said it plans to sell C$150 million in senior unsecured notes due in 2017. Bank of Nova Scotia and Toronto-Dominion Bank units are leading the sale. The company also said it plans to close a C$250 million revolving credit facility.

Canadian banks lost C$22 billion between 2007 and 2009 from capital markets investments, increasing risk for the lenders’ bondholders, Moody’s Investors Service reported yesterday.

Canadian Bank Risk

Canadian banks have expanded their capital markets businesses, leading to losses that were equal to 22 percent of “core” earnings over the period, the ratings company said.

Enbridge Inc. sold C$250 million in 2.93 percent bonds due in September 2015. The bonds priced to yield 91.8 basis points over government benchmarks.

Fortis plans debt sales in the fourth quarter for its Fortis Alberta, FortisBC and Terasen Gas units, Perry said. Each Fortis unit will probably sell C$100 million to C$150 million a year worth of bonds, he said.

Fortis raised power rates by an average of 3.5 percent starting Jan. 1 after regulators in British Columbia, Ontario, and Newfoundland approved increases for 2010. Fortis’s second- quarter net income rose 3.8 percent to C$55 million as the company benefited from increased electricity sales and higher rates. The company’s stock rose yesterday to C$30, a record high.

Higher Earnings

“Clearly with Fortis, you are sitting on an increased earnings profile,” Roshan Thiru, an analyst at Manulife Financial Corp.’s MFC Global Asset Management unit, said in a telephone interview from Toronto. “The Fortis group of subsidiaries got a lot of positive regulatory decisions last year, and you are starting to see that trickle into earnings this year.”

MFC Global oversees about C$16 billion in Canadian fixed- income assets for clients, including bonds of Fortis Alberta and Epcor.

Investors are flocking to utilities’ bonds amid growing concern that the global economy may sink back into recession.

“Market sentiment has been negative and when that happens, people look for defensive sectors,” said Thiru. “Clearly in Canada, the utility sector is viewed as defensive because of the favorable regulatory regime and the stability of the cash flows.”

Across Canada

Fortis serves about 2.1 million customers through a natural gas utility in British Columbia, as well as electric utilities in five Canadian provinces and three Caribbean countries. Regulated operations account for about 90 percent of earnings and assets.

Most of Fortis’s planned C$5 billion spending program will target Alberta and British Columbia, two of Canada’s fastest- growing provinces. Alberta is home to the largest reserves of crude oil outside Saudi Arabia.

“Alberta and British Columbia are provinces we expect healthy growth from, and the last thing they want are blackouts due to a lack of infrastructure or a lack of power,” Lanny Pendill, an analyst with Edward Jones & Co. in St. Louis, said in a telephone interview. “The regulators understand that.”

DBRS Ltd. will consider upgrading its ratings on the company’s unsecured debentures and preferred shares “if Fortis continues to exhibit strong financial and operating performance and maintain its conservative financial practices,” analysts Robert Filippazzo and Michael Caranci wrote in a June 17 report.

“Their regulated business helps us feel confident that Fortis is going to earn a reasonable return on its investment,” Pendill said.

To contact the reporter for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net. Chris Fournier in Montreal at cfournier3@bloomberg.net.

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