Morningstar DBRS Confirms FortisBC Inc.’s Issuer Rating and Unsecured Debentures at A (low), Stable; Confirms Commercial Paper at R-1 (low), Stable; Discontinues Rating on Secured Debentures

DBRS Limited (Morningstar DBRS) confirmed FortisBC Inc.'s (FBC or the Company) Issuer Rating and Unsecured Debentures at A (low) and Commercial Paper at R-1 (low). All trends remain Stable. Morningstar DBRS also discontinued its credit rating on FBC's Secured Debentures, which were fully repaid in August 2023 and are not expected to be issued again in the future.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect (1) FortisBC Inc.'s (FBC or the Company) business risk profile, which remains unchanged as a vertically integrated utility under a stable regulatory setting; (2) the strong credit metrics in 2023 and Morningstar DBRS's expectation that the metrics will remain supportive of its current ratings over the medium term; (3) solid liquidity; and (4) good operational efficiency and reliability.

CREDIT RATING DRIVERS
A positive rating action could occur if FBC's business risk profile improves meaningfully from the current level while maintaining strong credit metrics. While unlikely, a negative rating action could occur if the Company's business risk profile significantly deteriorates and/or its key credit metrics weaken to a level no longer supportive of the current credit ratings (i.e., debt-to-capital above 60% and cash flow-to-debt below 12.5% for a sustained period).

EARNINGS OUTLOOK
FBC's earnings have demonstrated modest but steady growth in recent years. Morningstar DBRS anticipates that this positive trend will continue, driven by the projected higher rate base, continuing operational efficiencies, and higher rates resulting from the Generic Cost of Capital (GCOC) Stage 1 Decision.

FINANCIAL OUTLOOK
Morningstar DBRS expects FBC’s credit metrics to improve, in line with the higher earnings and cash flow expectation, while remaining within the range of its current rating category for the medium term. FBC's projected capital expenditure (capex) for 2024 (excluding contributions in aid of construction) are approximately $134 million and are only modestly higher than in 2023. Morningstar DBRS expects the Company to prioritize cash flows in its capex program, with actual leverage maintained in line with the approved regulatory capital structure.

CREDIT RATING RATIONALE
FBC's business risk assessment remains unchanged under a reasonable regulatory environment set by the British Columbia Utilities Commission (BCUC). Energy costs are fully passed, while operating and maintenance costs are indexed for inflation with a 50/50 sharing of variances between ratepayers and the Company. Morningstar DBRS views FBC, a vertically integrated utility company with generation assets, as having modestly higher business risk than that of a utility with only transmission and distribution assets. Additionally, Morningstar DBRS considers FBC's franchise and customer mix less favorably given the less economically robust service territory with a load mix heavily weighted towards residential and commercial.

FBC's financial risk assessment has been supportive of its current ratings. This is attributed to the Company's steady cash flow, reasonable debt leverage in the capital structure, and strong liquidity. About 60% of the capex was comfortably funded by internal cash flows, leaving a manageable deficit for external financing after accounting for dividends. In September 2023, the BCUC issued its GCOC Stage 1 Decision, determining that FBC's deemed equity and allowed return on equity (ROE) would change to 41% and 9.65% from 40% and 9.15%, respectively. Morningstar DBRS anticipates that the higher rates resulting from this decision will enhance FBC's credit metrics in the near to medium term. The decision also somewhat alleviates Morningstar DBRS concerns regarding FBC's relatively low allowed ROE and equity thickness compared with its North American peers.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of FBC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of FBC, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of FBC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (January 30, 2024), https://dbrs.morningstar.com/research/427244
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023),
https://dbrs.morningstar.com/research/410196

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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

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

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