DBRS Confirms FortisBC at A (low), with a Stable Trend

DBRS has confirmed the ratings of FortisBC Inc.’s (FortisBC’s or the Company’s) Secured Debentures and Unsecured Debentures at A (low), with Stable trends. The rating confirmation reflects FortisBC’s low business risk, stemming from the regulated nature of its operations and supportive regulatory environment; its integrated operations, which include a secure low-cost hydro-based power supply portfolio; its diversified customer base; its demonstrated ability to execute as planned; its stable credit metrics over the years despite the continued capital expenditure-driven free cash flow deficits; and its strong parental support from Fortis Inc. (Fortis, rated A (low), with a Stable trend); see separate DBRS rating report).

The regulatory environment remains stable and supportive, providing a strong cost-of-service/rate-of-return rate-setting methodology, with some performance-based rate (PBR)-setting attributes. The cost-of-service methodology allows for recovery of all forecast and prudently incurred power purchase costs, operating expenses and capital expenditures within a reasonable time frame.

In December 2010, FortisBC received approval by the British Columbia Utilities Commission (BCUC) for a 6.6% rate increase, effective January 1, 2011. The rate increase is inclusive of the 2011 Revenue Requirements negotiated settlement agreement and the 2011 Capital Expenditure Plan (CEP), as well as the 2011 allowed return on equity (ROE) of 9.90%. In addition, the BCUC also approved a refundable interim rate increase of 1.4% effective June 1, 2011, arising from an increase in 2011 power purchase expenses as a result of a refundable interim increase approved for British Columbia Hydro & Power Authority (BC Hydro, rated AA (high), with a Stable trend; see separate DBRS rating report dated June 6, 2011).

FortisBC filed its 2012–2013 Revenue Requirements Application, along with the Company’s Integrated System Plan (ISP), with the BCUC in June 2011, which resulted in a request for an interim 4.0% rate increase for electricity customers effective January 1, 2012, and a 6.9% increase effective January 1, 2013. The two-year Revenue Requirements is based on a cost-of-service/rate-of-return rate-setting methodology. The filing included the 2012–2013 CEP, which outlines capital expenditures necessary to provide reliable service, ensure public and employee safety and deliver Demand-Side Management (DSM) programs to the Company’s growing customer base.

The 2012–2013 CEP includes capital expenditures of $100.1 million and $123.2 million (net of customer contributions) and DSM expenditures of $5.8 million and $5.9 million for 2012 and 2013, respectively. The ISP includes the Company’s Resource Plan, Long-Term Capital Plan and Long-Term DSM Plan.

FortisBC’s ROE of 9.90% is a result of a positive 2009 decision that also determined that the automatic-adjustment mechanism that was used to determine the ROE on an annual basis would no longer apply and the ROE as determined would apply until changed by the BCUC. The Company’s deemed capital structure remains unchanged at 60% debt/40% equity. DBRS believes that while the ROE is favourable, uncertainty remains as to when and how ROE levels will be adjusted in the future.

FortisBC continues to invest in its significant capital program, which will be the greatest challenge for the Company over the medium term. The Company’s elevated capital expenditure program, which has been ongoing for several years and is expected to be between $450 million and $500 million over the next five years, is projected to cause continuing free cash flow deficits over the medium term. The primary focus of this large capital program is to provide reliable service to a growing customer base and to ensure public and employee safety. The resulting free cash flow deficits will continue to be funded with a combination of incremental debt financing and equity support from the parent, Fortis, to maintain its current credit profile and capital structure at the regulatory-approved levels. Fortis is a large, integrated utility holding company that has the financial wherewithal to provide equity support as required in this context.

DBRS expects the key credit ratios to remain stable over the next few years before showing modest improvement as capital expenditures level off. Despite the continuing free cash flow deficits over the near to medium term, DBRS expects the Company’s financial profile and credit metrics to remain adequate for the rating. With its $160 million in bank credit facilities (including a $10 million demand overdraft facility), FortisBC’s liquidity is considered sufficient to meet any short-term funding requirements.

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

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