DBRS Morningstar Confirms FortisBC Inc.’s Ratings at A (low)/R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, Secured Debentures rating, and Unsecured Debentures rating of FortisBC Inc. (FBC or the Company) at A (low). DBRS Morningstar also confirmed FBC’s Commercial Paper rating at R-1 (low). All trends are Stable. The confirmations reflect FBC’s strong financial risk profile despite the ongoing Coronavirus Disease (COVID-19) pandemic. The confirmations also reflect DBRS Morningstar’s view that the regulatory framework in British Columbia is supportive and stable for FBC’s business risk profile over the medium term. DBRS Morningstar also notes that the Unsecured Debentures have the same rating as the Secured Debentures because the amount of Secured Debentures outstanding is minimal (approximately 3% of total long-term debt).

The ongoing coronavirus pandemic had no material impact on FBC’s financial and operational performance in 2020 because FBC 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, 2020. The final approval was given in June 2020. The COVID-19 CRF has not had a material impact on FBC’s net accounts receivable balance.

In June 2020, the BCUC issued its decision on FBC’s Multiyear Rate Plan (MRP). In the BCUC’s decision, it 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% and (2) a forecast approach to the regular 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 FBC 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 FBC. Also, variances associated with revenues and other expenses, including those not controllable, are recorded in deferral accounts to be refunded to or recovered from customers. FBC’s credit profile is further supported by its deferral accounts, which stabilize power-supply cost for the benefit of the customers. The BCUC kept all the deferral accounts substantially 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 9.15% and 40.0%, respectively. The BCUC will initiate generic cost of capital (GCC) proceedings in spring 2021, which will include a review of the deemed equity component of total capital structure and allowed ROE for FBC and other regulated utilities in British Columbia effective January 2022. DBRS Morningstar notes that any material changes in the allowed ROE or deemed equity as a result of GCC proceedings may affect FBC's credit profile.

FBC’s credit metrics in 2020 remained solidly supportive of the current ratings and the cash flow-to-debt and interest coverage ratios were consistent with the 2019 levels. Capital expenditure for 2021 is expected to be approximately $150 million (including the allowance for funds used during construction but excluding customer contributions in aid of construction), which will result in a modest free cash flow deficit. DBRS Morningstar expects FBC to finance the cash flow deficit in a manner that will maintain the regulatory capital structure of 40% equity and 60% debt. DBRS Morningstar expects FBC’s credit metrics to remain stable over the near to medium term. If FBC’s credit metrics weaken significantly from the current level on a sustained basis, it could negatively affect the Company’s ratings. However, DBRS Morningstar considers this scenario unlikely.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (October 27, 2020; https://www.dbrsmorningstar.com/research/368939/rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry ); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020; https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers ); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships ), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262 ).

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.

DBRS Morningstar 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@dbrsmorningstar.com.

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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