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

DBRS Limited (DBRS) confirmed the Issuer Rating and Secured Debentures and Unsecured Debentures ratings of FortisBC Inc. (FBC or the Company) at A (low). DBRS also confirmed FBC’s Commercial Paper rating at R-1 (low). All trends are Stable. The confirmations reflect FBC’s stable business risk profile and solid financial performance in 2018. The Unsecured Debentures have the same rating as the Secured Debentures because the amount of Secured Debentures outstanding is minimal (approximately 3.4% of total long-term debt).

The Company’s business risk profile remains stable as FBC is in the final year of the six-year Performance-Based Ratemaking Plan (PBR; 2014 to 2019). The PBR provides an incentive mechanism for improving operating and base capital expenditure (capex) efficiencies. It also allows the Company to generate relatively predictable cash flow and a reasonable recovery of operating and capex costs (outside of the formulaic operating and maintenance costs (O&M costs)) through flow-through deferral accounts. Approved by the British Columbia Utilities Commission, FBC’s allowed return on equity of 9.15% and deemed equity component of the capital structure of 40% have remained consistent throughout the PBR term and remain acceptable for the rating category. The Stable trends reflect DBRS’s expectation that the next PBR term (2020 to 2024) would not have a material impact on FBC’s credit profile.

The current ratings incorporate FBC’s exposure to risk relating to the recovery of formulaic O&M costs and base capex. This risk reflects the concept that FBC’s credit metrics could be negatively affected if its actual O&M costs and base capex are higher than formulaic O&M costs and base capex. However, DBRS views this risk as modest and manageable, as only 50% of variances from formulaic O&M costs and 50% of earnings on the variance in base capex within the dead-band threshold are not recovered from customers in future years. On the other hand, the 50/50 sharing of variances from the formula-driven O&M costs and base capex incentivizes FBC to improve operational efficiency during the PBR period. FBC has managed to control O&M costs and base capex so that they are relatively consistent with the forecast.

FBC’s credit metrics in 2018 remained relatively stable and are supportive of its current ratings. Capex for 2019 is expected to be approximately $108 million (including removal costs but excluding customer contributions in aid of construction), which will result in a modest cash flow deficit. Since the Company intends to maintain a capital structure in line with the deemed regulatory capital structure 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 ratings could be negatively affected.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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