DBRS Confirms FortisBC Energy Inc. at “A”, Stable Trend

DBRS has today confirmed the Medium-Term Notes (MTNs) & Unsecured Debentures (Debentures) and secured Purchase Money Mortgages (PMMs) ratings of FortisBC Energy Inc. (FEI or the Company) at “A”, and its Commercial Paper rating at R-1 (low). The trends are Stable. The MTNs and Debentures have the same rating as the PMMs based on the following: (1) the outstanding amount of the PMMs is not significant (17% of the total); and (2) DBRS does not expect FEI to issue additional PMMs in the future. The rating confirmation reflects FEI’s low-risk business with predominantly regulated operations in an economically strong area, a solid financial profile and a reasonable regulatory environment.

FEI’s low-risk business is underpinned by its regulated gas transmission and distribution operations (virtually all of FEI’s earnings) and sizable customer base (852,000 or 90% of the province’s natural gas users). Competition in the Company’s franchise area remains limited to electricity, with FEI retaining a competitive operating cost advantage reflecting the current low natural gas price environment. The regulatory framework in British Columbia is viewed as reasonable in terms of cost recovery, returns on equity (ROE of 9.5%) and capital structure (40%). Although FEI’s ROE and capital structure could be affected in 2013 due to a regulatory review, DBRS does not expect the outcome of the regulatory review to have a material impact on the Company’s earnings and cash flow.

The Company’s financial profile remained relatively stable in 2011, with solid debt-to-capital and interest coverage metrics. This was supported by stronger cash flow and the $125 million equity issuance in 2010 (due to a 5% increase in deemed equity). The cash flow-to-debt metric, despite being slightly weaker than DBRS’s “A” rating guidelines, has consistently improved since 2007. FEI is expected to generate negative free cash flow in 2012 as a result of capital spending ($195 million in 2012), which is mainly due to its Customer CareEnhancement Project (CCE). DBRS expects FEI to continue to finance the deficits by managing its dividend payouts and equity issuances to the parent, as well as debt issuances, and maintaining its debt-to-capital ratio in line with the current rating. In the absence of an adverse regulatory decision on its ROE and capital structure, beyond what DBRS has expected, FEI’s credit metrics are expected to remain relatively stable, supported by higher earnings and cash flow.

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.