DBRS Confirms FortisBC Energy Inc. at A and R-1 (low), Stable Trend

DBRS has today confirmed the Issuer Rating of FortisBC Energy Inc. (FEI or the Company), along with its Medium-Term Notes (MTNs) & Unsecured Debentures (Debentures) and Purchase Money Mortgages (PMMs), at “A,” and its Commercial Paper at R-1 (low), all with Stable trends. 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 (16% of total debt) and (2) DBRS does not expect FEI to issue additional PMMs in the future. The ratings reflect FEI’s good financial profile, low-risk business underpinned by its regulated distribution operation in an economically strong area, and a reasonable regulatory environment.

On February 26, 2014, the British Columbia Utilities Commission (BCUC) issued a decision on FortisBC Energy Utilities’ (the FEU) Application for Amalgamation and Rate Design (the Decision). The FEU comprises FEI, FortisBC Energy (Vancouver Island) Inc. (FEVI) and FortisBC Energy (Whistler) Inc. (FEW). DBRS viewed the Decision as credit neutral to FEI (for more information, see DBRS press release dated February 26, 2014).

FEI’s business risk is reflective of an “A” rating category, supported by the following factors: (1) FEI, as a regulated natural gas distributor, has no exposure to gas price risk and (2) FEI serves a large customer base in an economically strong franchise area. In May 2013, the BCUC issued a decision on the first stage of the Generic Cost of Capital (GCOC) Proceeding. In the decision, the benchmark utility’s (which is determined to be FEI) return on equity (ROE) would be set at 8.75% and deemed equity at 38.5%, both effective January 1, 2013 and unchanged in 2014 (ROE and deemed equity in 2012 were 9.50% and 40%, respectively). This unfavourable decision negatively affects FEI’s earnings. In June 2013, FEI filed a Multi-Year Performance Based Ratemaking (PBR) Plan for 2014 through 2018. The BCUC approved a refundable interim increase for 2014 of 1.4%, with a final decision expected in Q3 2014. FEI’s large customer base should allow FEI to maintain a good level of efficiency during the PBR period, in which an annual delivery rate increase is set under a formula approach for operating and capital costs.

FEI’s credit metrics remained in the “A” rating range. FEI’s 2014 capex is estimated to increase to nearly $300 million (including cost of removal) before customer contributions. This increase is largely associated with the Tilbury LNG Facility Expansion Project (See the Tilbury Project Section). DBRS expects FEI to prudently fund its 2014 capex program and maintain its credit metrics in line with DBRS’s “A” rating range.

Notes:
All figures are in Canadian dollars 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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