DBRS Morningstar Confirms Fortis Inc. at BBB (high) and Pfd-3 (high), Changes Trends to Positive

DBRS Limited (DBRS Morningstar) changed the trend for all ratings of Fortis Inc. (Fortis) to Positive from Stable and confirmed the ratings as listed below. The Positive trends reflect (1) a significant reduction of nonconsolidated corporate debt following the sale of a 51% interest in the Waneta Hydroelectric Expansion (the Waneta Expansion) and the $1.2 billion common equity issuance in December 2019, (2) solid consolidated credit metrics in 2019 and expected solid consolidated metrics in the near-to-medium term, and (3) a continued strong business risk profile at regulated utilities. The current ratings take into account Fortis’ structural subordination and mitigation factors such as the diversification of regulatory jurisdictions and the size, stability, and sustainability of cash flow.

The confirmations incorporate DBRS Morningstar’s expectation that the ongoing Coronavirus Disease (COVID-19) pandemic will not have a material impact on Fortis’ operations and its major capital projects, as well as its 2020 credit metrics. Most of Fortis’ assets are essential services and are extremely important to maintain the continual economic activities and social and health safety. The coronavirus pandemic is not expected to significantly affected Fortis’ volume distributions as most of Fortis’ regulated utilities either benefit from deferral accounts or decoupling, which significantly reduces the impact of volume volatility. Capital project executions are not expected to experience significant delays at this time but they could face some delays if the coronavirus-related restrictions continue for a longer period of time, and in that case, capital expenditure (capex) is expected to shift to subsequent years of the 2020–24 capex plan. DBRS Morningstar expects any potential cost overruns can be recovered through regulatory applications because the costs are beyond management’s control and expectation.

From a regulatory perspective, there have not been material changes since DBRS Morningstar’s last rating review on May 2, 2019. Regulated utilities in British Columbia (B.C.) are in their first year of the Multiple-Year Rate Plan (2020–24), which is similar to the 2013–19 Performance Base Regulation (PBR). Alberta’s regulated operations are also under a new period of PBR, which presents a higher degree of risk with respect to the recovery of capex beyond management’s expectation and control. However, the overall regulatory risk in Alberta remains reasonable and provides an opportunity for FortisAlberta Inc. (rated A (low) with a Stable trend by DBRS Morningstar) to earn good returns. Regulated operations in Newfoundland, New York, and Arizona are under cost of service and have not experienced any material changes in regulations. ITC Holdings (ITC), a transmission company, continues to benefit from timely cost recovery, good return on its investments, and stable cash flow despite having lower all-in return on equity (ROE) of 10.63% (including incentive adders) compared with the previous all-in ROE of 11.07%.

With respect to Fortis’ financial risk profile, there has been significant improvement in Fortis’ nonconsolidated metrics while its consolidated metrics have remained solid and stable. Fortis’ stable consolidated metrics reflect the fact that all Fortis’ regulated utilities maintain their capital structure in line with the regulatory capital structure or deemed equity. The improvement of nonconsolidated metrics reflect a significant reduction in corporate debt. In 2019, Fortis sold its 51% interest in the Waneta Expansion in B.C. for approximately $1.0 billion and issued approximately $1.2 billion in common equity. Its corporate debt decreased to approximately $3.6 billion from $5.4 billion in 2018 (approximately $6.0 billion following the ITC acquisition in 2016). In the meantime, cash flows to Fortis from its subsidiaries have significantly increased as the rate base grows. As a result, Fortis’ nonconsolidated metrics strengthened in 2019 as follows: nonconsolidated debt-to-capital decreased to 18% from 26.5% in 2018 (31.7% in 2016) and cash flow-to-nonconsolidated debt increased to 19.0% from 11.7% in 2018 (7.5% in 2016). DBRS Morningstar expects the leverage level to remain stable over the medium term as there are currently no material financing requirements at the corporate level. Fortis expects to benefit from incremental cash flow at its subsidiaries as a result of substantial capex program over the next five years.

Fortis’ expects its growth over the next few years to be mostly organic. The capex plan for the 2020–24 period is approximately $18.8 billion, of which 99% will be spent on the regulated businesses. As a result, Fortis anticipates its rate base to increase to $38.4 billion in 2024 from approximately $28 billion in 2019. This will further strengthen Fortis’ business risk profile. Fortis plans to fund a majority of its capex program with internally generated cash flow, with the remainder from subsidiary debt and its dividend reinvestment program. DBRS Morningstar considers the financing plan to be reasonable and should not have a material impact on Fortis’ credit metrics in the near-to-medium term.

DBRS Morningstar would upgrade Fortis to A (low) if (1) it can maintain its current business risk profile through this challenging period and the macro environment stabilizes; and (2) Fortis can keep its consolidated metrics stable around the current levels, as well as sustain its nonconsolidated debt-to-capital and cash flow-to-nonconsolidated debt ratios in the low-20% range and at least 12.5%, respectively.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 16, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 [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 additional 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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