Morningstar DBRS Confirms FortisBC Energy Inc.'s Issuer Rating at "A," Stable Trend

DBRS Limited (Morningstar DBRS) 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). The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
FEI's credit profile remains stable and is underpinned by (1) its low-risk gas distribution business with no commodity price risk and minimal volume risk; (2) the reasonable regulation environment under the British Columbia Utilities Commission (BCUC), which has a history of allowing the Company to generate steady cash flows and achieve its authorized returns; (3) an economically strong franchise area with a sizable customer base; and (4) solid credit metrics in the "A" credit rating range.

There has been no material change in British Columbia's regulatory environment since the last review. In April 2024, FEI filed an application with the BCUC for approval of a rate-setting framework for 2025 through 2027. The proposed framework is based on the current Multi-Year Rate Plan (MRP). A decision is expected in the second half of 2025. Based on the filed application, Morningstar DBRS does not anticipate any material changes in the next MRP period that would have a negative impact on FEI's credit metrics.

The Company began construction of the Eagle Mountain-Woodfibre Gas Line project in September 2023. FEI is installing about 50 kilometres of new natural gas pipeline between Squamish and Coquitlam, British Columbia, with a tunnelling component. FEI is required to fund $750 million by 2027 with $400 million of capital expenditures (capex) incurred in 2024. FEI's investments will be fully rate-based with costs recovered through an escalating toll. The project is expected to be completed in 2027. Morningstar DBRS expects FEI to finance the capex and maintain its debt-to-capital ratio consistent with the regulatory capital structure and has factored project execution risk into the credit rating decision.

Morningstar DBRS notes that FEI has increased its Commercial Paper (CP) program limit to $900 million from $700 million, backstopped by a $900 million committed revolving credit facility maturing in July 2028. Based on its review, Morningstar DBRS is satisfied that the Company's revised CP program limit and its current credit facilities meet Morningstar DBRS' requirements as outlined in the Commercial Paper Liquidity Support for Nonbank Corporate Issuers section of the "Morningstar DBRS Global Corporate Criteria."

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given FEI's stable business risk profile and significant capex program. Morningstar DBRS could take a negative credit rating action should there be any adverse regulatory, or a material weakening of FEI's credit metrics to a level no longer in line with the current credit rating category, such as cash flow-to-debt ratio below 12.5%.

EARNINGS OUTLOOK
FEI's earnings have been growing steadily over the past years, reflecting growth in the rate base. Stronger earnings in 2023 benefitted from the net impact of the higher allowed return on equity and deemed equity from the latest Generic Cost of Capital decision and higher income tax benefits from a tax loss utilization plan (TLUP). In the medium term, excluding the impact of the TLUP, Morningstar DBRS expects earnings to remain stable assuming approval of the 2025-27 rate-setting framework.

FINANCIAL OUTLOOK
FEI's key credit metrics have remained supportive of the current "A" credit ratings. Morningstar DBRS expects the Company's cash flow-to-debt to average approximately 16% in the medium term. Morningstar DBRS expects capex to remain elevated, and the Company will receive periodic equity injections from its parent to maintain its leverage in line with the regulatory capital structure of 55% debt. Morningstar DBRS views FEI's liquidity as solid, reflecting stable cash flows and sizable credit facility availability, and the next long-term debt maturity is not until 2026.

CREDIT RATING RATIONALE
FEI's credit ratings are supported by the supportive regulatory framework, its economically strong franchise area, and solid credit metrics. These are offset by project execution and business expansion risk, transition risk, and long-term competition from electricity.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

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

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

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024), https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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/431153.

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-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577