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

DBRS has today confirmed the Issuer Rating, Secured Debentures and Unsecured Debentures of FortisBC Inc. (FBC or the Company) at A (low) with a Stable trend. The Unsecured Debentures have the same rating as the Secured Debentures, reflecting (1) that the amount of Secured Debentures outstanding is minimal (4% of total debt) and (2) that FBC does not intend to issue additional Secured Debentures in the future. The ratings of FBC reflect its solid financial profile, reasonable regulatory framework, diversified customer base and a rate base growth of approximately 23% over the past three years.

FBC’s business risk profile is reflective of the “A” range, based on DBRS’s rating categories, supported by: (1) Most of FBC’s assets and cash flow are in the regulated utility business, which operates in a reasonable regulatory framework, allowing FBC an opportunity to recover all of its prudently incurred operating and capital costs and earn a reasonable return on equity (ROE); (2) including the acquisition of the City of Kelowna’s electrical utility assets in 2013, FBC’s direct customers increased by approximately 14,400 (or 13%), further strengthening and diversifying its direct customer base; and (3) FBC’s exposure to revenue variances from the forecast for rate-setting purposes is mitigated through deferral accounts. DBRS notes that the British Columbia Utilities Commission’s decision on the first stage of the Generic Cost of Capital (GCOC) to reduce FBC’s interim ROE to 9.15% effective January 1, 2013 (9.9% in 2012), had a negative impact on FBC’s earnings. The decision on the second stage of the GCOC, released on March 25, 2014, confirmed FBC’s ROE of 9.15% and equity thickness of 40%. In addition, the outcome of FBC’s proposed rate-setting methodology for the next five years (the PBR plan) is uncertain. DBRS believes that an adverse decision on the PBR plan could have a negative impact on FBC’s credit profile and could change DBRS’s current view of the regulatory regime in BC.

FBC’s financial profile remained solid, with all credit metrics being maintained in the “A” category. The Company’s major capital expenditures (capex) to extend the life and upgrade a majority of its hydroelectric units was substantially completed in 2011. However, a capex program is still required to maintain system reliability and to accommodate customer growth. As a result, FBC is expected to generate modest free cash flow deficits and require external funds. DBRS expects FBC’s parent to continue to provide financial support in a timely manner, if needed, and that FBC will maintain its capital structure in accordance with the regulatory capital structure and all of its key credit metrics within DBRS’s “A” rating range.

Notes:
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 Regulated Electric, Natural Gas and Water Utilities Industry (January 2014), which can be found on our website under Methodologies.