DBRS Morningstar Confirms FortisBC Energy Inc. at “A,” Stable

DBRS Limited (DBRS Morningstar) confirmed FortisBC Energy Inc.’s (FEI) Issuer Rating and MTNs & Unsecured Debentures rating at “A” and its Commercial Paper rating at R-1 (low). All trends remain Stable. The confirmations reflect FEI’s strong financial risk profile despite the ongoing Coronavirus Disease (COVID-19) pandemic. The confirmations also reflect DBRS Morningstar’s expectation that the regulatory framework in British Columbia (BC) will remain supportive and stable as FEI is in the first year of its 2020–24 Multi-Year Rate Plan (MRP). DBRS Morningstar expects that the MRP will not materially change FEI’s business risk profile over the medium term.

The ongoing coronavirus pandemic has had no material impact on FEI’s financial and operational performance to date. FEI continues to operate critical infrastructure and provide essential services. DBRS Morningstar notes that, in April 2020, the British Columbia Utilities Commission (BCUC) gave interim approval for a COVID-19 Customer Recovery Fund (COVID-19 CRF) to allow residential and small commercial customers to elect to defer their bill payments for three months from April 1 to June 30. The final approval was given in June 2020. The COVID-19 CRF does not have a material impact on FEI’s accounts receivable.

In June 2020, the BCUC issued its decision on FEI’s MRP. In its decision, the BCUC approved, among other items, the following key features in the MRP: (1) a level of operation and maintenance (O&M) expense per customer indexed for inflation, less a fixed productivity factor of 0.5% (reduced from 1.1%); (2) a similar approach to capital growth; and (3) a forecast approach to sustainment capital. DBRS Morningstar believes that the use of O&M costs per customer, which will be subjected to a true-up in subsequent years, will help FEI to eliminate the impact of any forecast variances. In addition, the MRP also provides incentives for operational efficiency with a 50:50 sharing of variances from allowed return on equity (ROE) between customers and FEI. Also, variances associated with revenues and other expenses, including those are not controllable or associated with clean growth capital expenditures (capex) are recorded in deferral accounts to be refunded to or recovered from customers. FEI’s credit profile is further supported by its deferral accounts, which are used to stabilize the impact of volatility of gas volume sales, cost of gas, and midstream delivery charges for the benefit of its customers. BCUC kept all the deferral accounts unchanged in its 2020–24 MRP decision. DBRS Morningstar notes that allowed ROE and the deemed equity component of the capital structure remained unchanged at 8.75% and 38.5%, respectively.

FEI’s financial profile remained solid in the last 12 months to September 30, 2020. Cash flow remained relatively stable compared with 2019. FEI’s rate base continued to grow modestly, largely reflecting customer growth. As at September 30, 2020, the debt-to-capital ratio remained within regulatory capital structure. FEI’s other key credit metrics remained stable and were consistent with DBRS Morningstar’s required levels to support the current ratings. FEI’s liquidity was viewed as solid, reflecting stable cash flows, sizable credit facility availability, and no long-term debt maturing within the next five years.

FEI is currently undertaking a number of major capital projects that will require large capex in the next few years. DBRS Morningstar expects that FEI will manage and complete its capital projects on time and within budget. DBRS Morningstar also expects FEI to finance its capex and maintain its debt-to-capital ratio consistent with the regulatory capital structure. Given the current regulatory environment and FEI’s financing plan, a rating upgrade is unlikely. DBRS Morningstar expects the regulatory environment in BC to remain stable during the term of the MRP. However, any regulatory decisions or FEI business decisions that may have a material adverse effect on FEI’s business risk profile or a material weakening of FEI’s credit metrics for a sustained period could result in a negative rating action. DBRS Morningstar considers these events as unlikely.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 27, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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