DBRS Morningstar Confirms FortisAlberta Inc. at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of FortisAlberta Inc. (FAB or the Company) and the rating of its Senior Unsecured Debt at A (low). The trends are Stable. The confirmations reflect the Company’s low-risk and stable business profile and its solid credit metrics. The Stable trends reflect DBRS Morningstar's expectation that FAB will continue to benefit from the second Performance-Based Regulation (PBR) regulatory framework in Alberta and maintain a solid credit profile throughout the cost-of-service (COS) methodology year in 2023 and in the medium term, subject to the outcome of the regulatory decision on the next PBR term beyond 2023.

FAB is in the last year of the second PBR term (2018–22). Cash flow benefitted from a modest rate base increase in 2022, reflecting customer growth and capital expenditures on system upgrades. From a cost of capital perspective, the allowed return on equity (ROE) and equity thickness in the regulatory capital structure for 2022 and 2023 remain unchanged from 2021 at 8.5% and 37.0%, respectively. In June 2022, the Alberta Utilities Commission (AUC) commenced the second stage of General Cost of Capital proceeding, which will explore a formula-based approach to cost of capital for 2024 and beyond. DBRS Morningstar believes any material changes to the current allowed ROE and equity thickness would affect FAB's funding plan and cash flow. FAB will be under the COS methodology in 2023 (or the rebasing year). DBRS Morningstar is of the view that the 2023 COS regulation will allow FAB to remain resilient in coping with rising inflation and interest rates.

In July 2022, the AUC issued a decision confirming that FAB and other Alberta utilities will be operating under a third PBR from 2024 to 2028. The AUC issued the final list of issues to be considered in determination of the parameters for the third PBR plans, which included (i) the timing of rate changes, (ii) incremental capital funding provisions, (iii) the inflation factor, (iv) an earnings sharing mechanism, and (v) quantification and tracking of efficiencies during the next PBR term. DBRS Morningstar expects the third PBR plans will not have any materially negative impact on FAB’s credit profile. DBRS Morningstar, however, could take a negative rating action if there will be adverse changes in the third PBR term that may materially weaken FAB’s current credit profile.

FAB's credit metrics in the last 12 months ended September 30, 2022, were solid and relatively stable, underpinned by increases in rate base, reasonable debt leverage, reliable and efficient operations as well as effective capital project executions. FAB has no exposure to commodity-price volatility and has manageable volume risk. Based on FAB's current cash flow projection and its financing plan, DBRS Morningstar expects the Company’s credit metrics to remain stable in the medium term and through the rebasing year in 2023, and to continue to support the current ratings.

DBRS Morningstar could take a positive rating action if there is a significant improvement in FAB's credit profile. Although unlikely, DBRS Morningstar could take a negative rating action should the regulatory framework in Alberta, FAB's business risk profile, or its credit metrics deteriorate significantly over a sustained period.

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 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/396929 (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

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 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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