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

DBRS Limited (DBRS) confirmed the Issuer Rating, as well as the Secured Debentures and Unsecured Debentures ratings of FortisBC Inc. (FBC or the Company) at A (low) with Stable trends. The confirmations reflect the Company’s stable business risk profile and its stable and solid financial performance in 2017. The Unsecured Debentures have the same rating as the Secured Debentures, reflecting (1) that the amount of Secured Debentures outstanding is minimal (approximately 3.5% of total long-term debt) and (2) that FBC does not intend to issue additional Secured Debentures.

There were no material regulatory or operational changes to FBC’s business risk profile in 2017. The Company is in the fifth year of the six-year Performance-Based Ratemaking Plan (PBR) (2014–2019). FBC’s return on equity (ROE) of 9.15% and deemed equity component of capital structure of 40% have remained consistent throughout the PBR and remain acceptable for the rating category. DBRS notes that the cost of capital for FBC is reviewed periodically by the British Columbia Utilities Commission (BCUC). Should the allowed ROE and the deemed equity component decrease materially from the current level, the ratings of FBC could be negatively affected.

The current ratings incorporate FBC’s exposure to risk with respect to formulaic operation and maintenance (O&M) costs and base capital expenditures (capex). This risk reflects the fact that FBC’s actual O&M expenses for the year could be higher than formulaic O&M costs. However, this risk is modest, as only one-half of the variances from formulaic O&M costs and base capex are not recovered from customers. On the other hand, the 50/50 sharing of variances from the formula-driven O&M and base capex incentivizes FBC to improve operational efficiency over the PBR period. The Company has managed to control O&M cost and base capex to be relatively consistent with the forecast.

FBC’s financial results remained solid in 2017, with improved EBITDA and cash flow, despite increased debt, which was largely a result of modest customer growth and an increase in the rate base. FBC’s credit metrics in 2017 remained relatively stable and are supportive of its current ratings. Capex for 2018 is expected to be approximately $100 million (before customer contributions in aid of construction and including cost of removal), which will result in a modest and manageable cash flow deficit. Since the Company maintains a capital structure in line with the deemed regulatory capital structure approved by BCUC of 40% equity and 60% debt, DBRS expects its credit metrics to remain stable over the near to medium term. Should FBC’s credit metrics weaken significantly from the current level on a sustained basis, its rating could be negatively affected.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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