DBRS Confirms FortisBC Inc. at A (low), Stable Trend

DBRS has today confirmed the Issuer Rating, Secured Debentures and Unsecured Debentures of FortisBC Inc. (FortisBC or the Company) at A (low), with Stable trends. The Unsecured Debentures have the same rating as the Secured Debentures, reflecting that (1) the amount of Secured Debentures outstanding is minimal (4% of total debt) and (2) FortisBC does not intend to issue additional Secured Debentures in the future. The rating of FortisBC reflects its solid financial profile, reasonable regulatory framework and diversified customer base.

In 2012, FortisBC offered to purchase the City of Kelowna’s electrical utility assets for approximately $55 million. The acquisition has been approved by the British Columbia Utilities Commission based on a net book value to be included in rate base of approximately $37.7 million, resulting in an approximate $17 million purchase price premium. The transaction is subject to further approvals and if obtained, it is expected to close prior to the end of Q1 2013.

FortisBC generates virtually all of its earnings from its integrated and regulated transmission, distribution and generation operations. Risks associated with the regulated electricity generating assets (which tends to be higher risk than transmission and distribution) are manageable, given that the hydro facilities are low cost, emission free and have no exposure to hydrology risk. FortisBC’s non-regulated Walden hydroelectric generating plant has a power supply agreement with BC Hydro, which is set to expire in Q4 2013 and is exposed to the risk that it will not be able to sell the power beyond the expiry of the current contract on similar terms.

The Company benefits from a reasonable regulatory environment (cost-of-service methodology) that provides a return on equity of 9.9% on a deemed equity component of 40%, subject to the Decision in the Generic Cost of Capital proceedings phase 1 and phase 2, as it relates to 2013 and beyond. Key credit metrics have remained stable over the past few years and free cash flow deficits, resulting from capital expenditures (capex) that were higher than historical depreciation, have been financed with a balanced mix of equity injections from its parent, Fortis Inc. (rated A (low)), and debt issuances. DBRS expects the Company to continue to fund free cash flow deficits and capex (approximately $130 million in 2013) in a prudent manner that will maintain its credit metrics within DBRS’s A (low) rating parameters.

Notes:
All figures are in Canadian unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.