DBRS Morningstar Confirms FortisBC Energy Inc.’s Issuer Rating at “A,” Stable Trend

DBRS Limited (DBRS Morningstar) confirmed FortisBC Energy Inc.’s (FEI or the Company) Issuer Rating and MTNs & Unsecured Debentures credit rating at “A” and its Commercial Paper credit rating at R-1 (low). All trends are Stable. The confirmations reflect FEI’s stable business risk profile and solid financial results. The Stable trends incorporate DBRS Morningstar’s expectation that, in light of the latest cost of capital decision, FEI's key metrics would improve while remaining within the range of its current credit rating category.

FEI's business risk profile remains stable reflecting (1) its low-risk gas distribution business with no commodity price risk, (2) an economically strong franchise area, and (3) a reasonable regulation environment under the British Columbia Utilities Commission (BCUC). In September 2023, the BCUC issued a decision on the first stage of the Generic Cost of Capital (GCOC) proceeding, which determined FEI's deemed equity and allowed return on equity (ROE) will change to 45% and 9.65% from 38.5% and 8.75%, respectively. This change, effective from January 1, 2023, would remain effective until otherwise determined by the BCUC. DBRS Morningstar opines the decision alleviates certain concerns regarding FEI's relatively low allowed ROE and equity thickness among its North American peers and will positively impact FEI's credit metrics.

FEI’s financial risk assessment remains stable with all key metrics supportive of the current "A" credit rating. Over the medium term, DBRS Morningstar expects the latest GCOC decision to provide an uplift to the Company's credit metrics; although, the benefits would be partially offset by a rise in debt to fund its large capital expenditure (capex) program. FEI is expected to undertake a number of major capital projects that will require high capex for the next few years, including the Eagle Mountain Woodfibre Gas Line project and Tilbury Expansion projects. DBRS Morningstar expects FEI to finance its capex and maintain its debt-to-capital ratio consistent with the regulatory capital structure and has factored project execution risk into its credit rating decision.

Given FEI’s current business risk profile and significant capex program, a credit rating upgrade is unlikely. A negative credit rating action is also considered unlikely but may occur should there be any adverse regulatory or FEI business decisions that may have a material negative effect on the Company’s business risk profile, or a material weakening of FEI’s credit metrics to a level no longer in line with the current credit rating category (i.e., cash flow-to-debt of less than 12.5%).

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 27, 2023; https://www.dbrsmorningstar.com/research/421106)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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