DBRS Updates Report on FortisBC Inc.

DBRS has today published an updated report on FortisBC Inc. The credit profile of the Company has remained Stable based on the Q2 2012 results and the latest regulatory development. The Unsecured Debentures have the same rating as the Secured Debentures, reflecting that (1) the amount outstanding of Secured Debentures is minimal (6% of total debt) and (2) FortisBC does not intend to issue additional Secured Debentures in the future. The rating of FortisBC reflects its strong business risk profile, solid financial profile and a reasonable regulatory framework.

FortisBC is one of a few investor-owned Canadian utilities that generate virtually all earnings from integrated, regulated operations (transmission, distribution and generation assets). Risks associated with the electricity generating assets (which tend to be higher than those of transmission and distribution) are manageable given that the hydro facilities are low cost and emission free, with no exposure to hydrology risk as a result of a long-term contract under the Canal Plant Agreement. The Company’s business risk profile benefits from a reasonable regulatory environment (cost-of-service (COS) methodology and performance-based rate (PBR) setting until 2011) that provides a return on equity at 9.9% on a 40% deemed equity component. The COS allows for recovery of prudently forecast power purchase costs and capital expenditures within a reasonable time frame, while the PBR provides an ROE-sharing mechanism whereby variances in actual financial performance are shared equally between customers and the shareholders.

Prior to 2012, FortisBC generated considerable negative cash flow due to high capital investments to accommodate customer growth and system reliability, and financed the deficits with a balanced mix of debt and equity injection from its parent, Fortis Inc. (rated A (low) by DBRS). As a result, the Company’s debt-to-capital ratio remained in-line with the regulatory capital structure (60% debt/40% equity) and other key credit metrics (cash flow and interest coverage ratios) were commensurate with the current rating category. Cash flow deficits are expected to continue due to the ongoing high capital expenditures (estimated $120 million per year over the next two years). However, DBRS expects the parent to continue to provide financial support in a timely manner to maintain the Company’s credit metrics within DBRS’s A (low) rating parameters.

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 (May 2011), which can be found on our website under Methodologies.