DBRS Morningstar Confirms FortisAlberta Inc.’s Issuer Rating at A (low), Stable Trend

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 achieved over 2022 and the first three quarters of 2023. The Stable trends reflect DBRS Morningstar's expectation that FAB's credit profile will remain stable attributable to regulated rate base growth and operational efficiency.

FAB's business risk assessment remains relatively stable as a pure play electric distribution utility under the regulation of the Alberta Utilities Commission (AUC). In October 2023, the AUC reached decisions in two regulatory proceedings. First, in the Generic Cost of Capital (GCOC) proceeding, the deemed equity was maintained at 37.0%, and a formula-based approach to return on equity (ROE) was adopted using a notional ROE of 9.0% with adjustments for changes in bond yields and bond spreads. DBRS Morningstar considers the transition to a formula-based approach for determining ROE to be modestly credit positive as it is expected to reduce regulatory lag. In addition, it should improve the responsiveness of ROE to market conditions with annual updates, albeit the benefit should be offset by a decrease in the stability of the ROE. Second, in the proceeding for the third-generation Performance-Base Regulation plan, DBRS Morningstar is of the view that the new parameters largely mirror the previous plan and will not have a material impact on the Company’s earnings and cashflow.

FAB incurred approximately $11 million of capital costs for restoration efforts related to the 2023 Alberta wildfires. As of September 30, 2023, the amount is not expected to meet the Z-factor criteria for cost recovery related to exogenous events, but will be managed through the Company's Urgent Repairs capital program designed for such events. DBRS Morningstar notes that the wildfires had no material impact on the Company's credit metrics and will not lead to higher customer distribution costs as the restoration was promptly managed by the Company.

FAB's credit metrics in the last 12 months ended September 30, 2023, were solid and relatively stable, underpinned by increases in rate base, reasonable debt leverage, reliable and efficient operations as well as effective capital project execution. 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 to continue to support the current ratings. DBRS Morningstar could take a positive rating action should FAB's credit metrics improve over a sustained period (e.g., a cash-to-debt ratio near or above 16%), assuming the regulatory framework in Alberta remains unchanged. Conversely, DBRS Morningstar could take a negative rating action should the regulatory framework in Alberta, FAB's business risk profile, or its credit metrics deteriorate meaningfully over a sustained period (e.g., a cash flow-to-debt ratio below 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)

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/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 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 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].

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