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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the ratings of the Secured Debentures and Unsecured Debentures of FortisBC Inc. (FBC or the Company) all at A (low) with Stable trends. The Unsecured Debentures have the same rating as the Secured Debentures, reflecting (1) that the Secured Debentures outstanding amount is minimal (3% of total debt) and (2) that FBC does not intend to issue additional Secured Debentures.

The ratings reflect the reasonable regulatory framework, good customer mix and rate base growth over the past five years, and a solid financial profile. The ratings also reflect FBC being an integrated utility (which adds to reliability of supply and a larger rate base, given the same number of customers). FBC’s owned generation assets provided approximately 45% of its 2014 energy requirement, with the remainder of the load secured through largely long-term purchase power contracts accepted by the British Columbia Utilities Commission.

The regulatory framework is underpinned by the following factors: (1) FBC has no exposure to commodity price risk and sales volume risk as variances from the forecast are deferred, with the majority being refunded to (or collected from) customers in subsequent years. (2) The equity component in the capital structure is 40%, unchanged from previous years. Allowed return on equity (ROE) was reduced in 2013 to 9.15% from 9.90%, negatively affecting earnings. This level is, however, still comparable with other jurisdictions in Canada. (3) FBC is currently in its second year of a Performance Based Ratemaking (PBR) plan through 2019. During the term of the PBR plan, FBC’s forecast risk is reduced as only one-half of variances from formulaic operation and maintenance (O&M) costs and base capital expenditures (capex) are not flow-through to customers. DBRS recognizes that O&M costs and base capex are primarily determined by a formula and that variances from the forecasted amount in the formula could affect earnings and cash flow. (4) Based on the off-ramp provision in the PBR plan, a review of the plan could be triggered if earnings in any one year vary from the approved ROE by more than +/-200 basis points (post 50/50 sharing of variances from formula-driven O&M expenses and capital expenditures.) or when earnings in two consecutive years vary from the approved ROE by more than +/-150 basis points (also post 50/50 sharing). This provides FBC with some downside protection while maintaining the incentive for operational efficiency.

The direct customer base growth has also been reasonable. The customer mix is viewed by DBRS as good, as it is heavily weighted toward residential and commercial customers (70% of the 2014 load) whose consumption is sensitive to weather but not as sensitive to macroeconomic conditions as industrial customers.

FBC’s financial profile remained solid and stable in 2014, with all credit metrics consistent with the current rating. The Company’s major capex to extend the life and upgrade a majority of its hydroelectric units was substantially completed in 2011. The 2015 capex program ($100 million before contributions in aid of construction and including cost of removal) is manageable, and is expected to result in only a modest free cash flow deficit. Going forward, should substantial external financing be required, DBRS expects FBC’s parent to continue to provide financial support in a timely manner 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 (October 2014), which can be found on our website under Methodologies.