DBRS Confirms FortisBC Holdings Inc. at BBB (high), Stable Trend

DBRS has confirmed the Medium-Term Note Debentures (MTNs) ratings of FortisBC Holdings Inc. (FHI or the Company) at BBB (high). The trend is Stable. The rating of FHI reflects the low business risk profile and stable cash flows of its regulated utility subsidiaries, stable credit metrics and the strong parental support of its parent, Fortis Inc. (FTS, rated A (low)). The rating also reflects the regulatory ring-fencing and structural subordination considerations at its subsidiaries as well as the long-term competitiveness of natural gas vis-à-vis alternative energy sources. FHI is the holding company of three natural gas distribution utilities, FortisBC Energy Inc. (FEI, rated “A”), FortisBC Gas (Vancouver Island) Inc. (FEVI) and FortisBC Gas (Whistler) Inc. (FEW), collectively referred to as the Utilities, as well as a 30% interest in Customer Works L.P. (a customer service provider), and 100% of FortisBC Alternative Energy Services (an alternative energy solutions provider).

The Utilities are expected to file an application in the Fall of 2011 to amalgamate the three companies under FHI. The amalgamation will require the British Columbia Utilities Commission’s (BCUC) approval and the Government of British Columbia’s consent to proceed. FEI’s current contribution to FHI’s overall earnings is approximately 75% and as such, it’s anticipated that the bulk of the amalgamated entity’s earnings will continue to be derived from FEI. At this time, DBRS anticipates that the potential amalgamation and associated rate harmonization will likely be credit neutral to FEI provided that there are no material changes that will negatively affect its deemed capital structure, allowed ROE or fundamental low-risk business model. Furthermore, DBRS anticipates that the potential amalgamation will not impact FHI’s consolidated or nonconsolidated financial profile.

FEVI’s $213 million Mt. Hayes liquefied natural gas (LNG) storage facility was completed on time, on budget and commenced commercial operations in June 2011. While the project is expected to increase FEVI’s rate base, FEI is contracting for two-thirds of the storage capacity, providing incremental earnings and cash flows not sourced from FEVI’s existing customer base. In early July 2011, the BCUC approved the option for the Chemainus and Cowichan First Nations to invest up to 15% of the equity component of the facility, that if exercised, will take place at the beginning of January 2012.

The regulatory environment in which FHI’s regulated subsidiaries operate remains stable and continues to provide for a number of cost-recovery mechanisms which, when combined with the rate-setting methodology, allow for a full recovery of all prudently incurred operating expenses and capital expenditures within a reasonable time frame. In May 2011, the Utilities filed their 2012-2013 Revenue Requirements and Delivery Rate Application (RRA) in which FEI forecasted customer rate increases of approximately 2.8% to 3.0% based on an average rate base of roughly $2,740 million to $2,790 million while FEVI requested 2012-2013 rates to remain unchanged on a rate base of approximately $790 million to $815 million. The decisions are anticipated in the first quarter of 2012.

Over the medium term, minimal-to-modest free cash flow deficits continue to be expected at FEI and FEVI, attributable to the replacement and refurbishment of existing infrastructure (which is anticipated to go into the rate base in a timely manner), and modest customer growth. On a consolidated basis, FHI’s overall credit profile is anticipated to remain reasonably consistent and adequate for its current ratings. Modest improvements with FEI, and thus FHI’s credit metrics may be attributed to the 2009 regulatory decision, however, key credit metrics at FHI are anticipated to remain generally lower than those of its peers primarily due to lower metrics from FEI. On a non-consolidated basis, FHI’s metrics also support its ratings, with the expectation that dividend payments from FEI alone will continue to be more than sufficient to cover FHI’s non-consolidated annual interest obligations.

FHI and the Utilities, in conjunction with their ultimate parent Fortis Inc. (FTS, rated A (low)), intend to transition to U.S. GAAP, as opposed to IFRS, in January 2012. The BCUC has approved FHI’s request to adopt U.S. GAAP to be used for regulatory reporting purposes from January 1, 2012 to December 31, 2014 but has directed the Company to re-apply by September 1, 2014 for approval of its regulatory accounting standard effective January 1, 2015. DBRS anticipates that any impact to the Company’s cash flow and cash-flow metrics upon successful conversion of accounting standards will be de minimis.

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

The applicable methodology is Rating Companies in the North American Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.