Fixed Income Quarterly—Gas & Electric Utilities
Page 3
Following a detailed overview of the company’s near-term outlook, we have revised our outlook on TransAlta bonds with a maturity date no later than 2020 to Market Perform from Underperform. We are maintaining our cautious outlook on the longer-dated bonds given the uncertainty surrounding replacement growth initiatives coupled with the credit rating implications of a changing business risk profile as contracted capacity declines.
We have an Underweight recommendation on the debt securi- ties of Nova Scotia Power. Our recommendation is based upon our view of more near-term headwinds than tailwinds leading up to the resolution of S&P’s current Negative outlook on the company’s BBB+ rating. We expect the outlook to be resolved following the closing of the Maritime Link project financing.
Key Themes
Debt Issuance – Domestic Utility fixed and floating rate new issuance during Q1/14 totalled $675 million (Table 1), represent- ing 3.3% of the $20.5 billion total corporate debt new issuance in the quarter. For 2014, we estimate the Utility sector will issue approximately $6.5 billion. The companies we expect to undertake the greatest issuance include Hydro One, AltaLink L.P. and CU Inc. In aggregate, we estimate these companies will issue ap- proximately $3.0 billion of public debt in 2014 (or 46% of total 2014E Utility issuance). We note that our estimates exclude one- off bond project financings for power generation facilities (save
Table 2: 2014E Issuance
Table 1: Utility New Issuance (2014)
Note: Includes all fixed rate investment grade utility sector issuance with settlement date in Q1 2014, excluding Maples
Source: BMO Capital Markets
Lower Mattagami Energy LP), for which $450 million of bonds have been issued year to date.
In terms of timing, we expect issuance levels will be stronger in H2/14 (similar to how things unfolded in 2013), which should bode well for spread performance in the first half of the year given the expected lack of supply. Of note, Hydro One was the only “pure play” Utility issuer to date, having completed two “niche” offerings: (1) a 50-year, $50 million offering in January; and (2) a $125 million, 5-year FRN in March. While we would never rule out the possibility of opportunistic financings, issuers finished off 2013 with minimal amounts drawn on credit facilities and, at times, healthy cash levels. However, as the year unfolds and the ongoing “above average” capital programs progress, we expect material issuance, especially from the regulated names.
Issuer Size Issue Date Coupon Maturity (C$ mm)
AltaGas Ltd.
AltaGas Ltd. Algonquin Power Co. Hydro One Inc. Hydro One Inc.
$100 13-Jan-2014 $200 13-Jan-2014 $200 17-Jan-2014 $50 29-Jan-2014 $125 21-Mar-2014
5.160% 4.400% 4.650% 4.293% 3M BA + 35
13-Jan-2044 15-Mar-2024 15-Feb-2022 29-Jan-2064 21-Mar-2019
Total Issuance $675
Maturities Capex Adj. 2014 Expected YTD 2014 2014E Remaining
Issuer ($mm) Funding ($mm) Issuance ($mm) Issuance ($mm) Issuance ($mm) ($mm)
Algonquin Power
AltaGas Ltd.
AltaLink Investments, L.P. AltaLink L.P.
BRP Finance ULC
Canadian Utilities Ltd. Capital Power L.P.
CU Inc.
Emera Inc.
Enbridge Gas Distribution ENMAX Corp.
EPCOR Utilities FortisAlberta
FortisBC
FortisBC Energy Inc.
Fortis Inc.
Gaz Metro Inc.
Hydro One Inc.
Hydro Ottawa Holding Inc. Lower Mattagami Newfoundland Power
Nova Scotia Power PowerStream
Toronto Hydro
TransAlta Corp.
Union Gas
Windsor Canada Utilities Ltd.
$0.0 $200.0 $200.0 $100.0 $0.0 $200.0
$0.0 $1,000.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$100.0 $900.0 $250.0 $0.0 $400.0 $0.0
$0.0 $0.0
$0.0 $200.0 $200.0 $125.0 $140.0 $60.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $750.0 $250.0 $0.0 $0.0
$0.0 $450.0 $29.4 $0.0 $0.0 $0.0
$0.0 $150.0
$0.0 $300.0 $200.0 $0.0 $150.0 $100.0
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $250.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$200.0 $200.0 $0.0 $300.0 $300.0 $0.0
$200.0 $0.0 $1,000.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1,000.0 $0.0 $250.0 $0.0 $400.0 $0.0 $250.0 $0.0 $200.0 $0.0 $325.0 $0.0 $200.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$200.0 $1,000.0 $0.0 $0.0 $0.0 $1,000.0 $250.0 $400.0 $250.0 $200.0 $325.0 $200.0 $0.0 $0.0 $0.0 $825.0 $0.0 $450.0 $0.0 $0.0 $150.0 $300.0 $0.0 $250.0 $0.0
$1,000.0 $175.0 $0.0 $0.0 $450.0 $0.0 ($29.4) ($0.0) $0.0
$0.0
$0.0
$0.0
($200.0)
$0.0 $250.0 $0.0
$0.0 $0.0 $150.0 $0.0 $300.0 $0.0
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Total $2,419.4 $4,035.0 $20.6 $6,475.0 $675.0 $5,800.0
Source: BMO Capital Markets, Company Reports