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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, the rating of Secured Debentures, and the rating of Unsecured Debentures 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 profile with strong metrics and solid liquidity in 2021, which are expected to remain relatively stable over the medium term. The confirmations also reflect DBRS Morningstar’s view that the regulatory framework in British Columbia (BC) is supportive and stable for FBC’s business risk profile through the Multiyear Rate Plan (MRP). DBRS Morningstar rates FBC's Unsecured Debentures the same as its Secured Debentures because the amount of Secured Debentures outstanding is minimal, accounting for only approximately 3% of total long-term debt.

DBRS Morningstar recognizes FBC's operational resiliency in coping with the November 2021 Pacific Northwest Floods (BC Floods), which had no material impact on FBC’s financial and operational performance for the year. The ongoing Coronavirus Disease (COVID-19) pandemic has also not had any material impact on FBC's performance because, as a regulated utility, FBC operates critical infrastructure and provides essential services to customers.

With respect to cost of capital proceedings in BC, the British Columbia Utilities Commission (BCUC) has initiated generic cost of capital (GCC) proceedings for regulated utilities in BC. GCC proceedings will include a review of the deemed equity component of total capital structure and allowed return on equity (ROE) for FBC and other regulated utilities in BC. DBRS Morningstar notes that any adverse material changes in the allowed ROE or deemed equity as a result of GCC proceedings that could potentially weaken FBC’s credit profile may affect FBC's rating.

In June 2020, the BCUC issued its decision on FBC’s 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 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 ROE between customers and FBC. Also, variances associated with revenue 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, until the conclusion of the next GCC proceeding.

FBC’s credit metrics in 2021 remained solidly supportive of the current ratings. The cash flow-to-debt and interest coverage ratios improved slightly compared with 2020 levels. Capital expenditures (capex) for 2022 are expected to be approximately $156 million (including the allowance for funds used during construction but excluding customer contributions in aid of construction), which will likely 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 (September 24, 2021; https://www.dbrsmorningstar.com/research/368939); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/357788 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).

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 [email protected].

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 addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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