Morningstar DBRS Confirms Fortis Inc. at A (low) and Pfd-2 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Fortis Inc.’s (Fortis or the Company) Issuer Rating and Unsecured Debentures rating at A (low) and the Company’s Preferred Shares rating at Pfd-2 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
Fortis’ credit ratings are based on the Company's large, stable, and diversified regulated utility portfolio along with its supportive consolidated credit metrics and solid liquidity. The current ratings take into account Fortis’ debt being structurally subordinated to the debt issued at its regulated utilities, partially offset by the diversification of regulatory jurisdictions, as well as the significant size, stability, and sustainability of the Company’s cash flow.

Fortis' regulatory risk profile remains stable, and Morningstar DBRS does not expect any regulatory decisions in the near term to have a material negative impact on the Company's current business risk profile. Positive noteworthy developments in 2023 include (1) British Columbia’s regulated utilities seeing a meaningful increase in their allowed return on equity (ROE) and equity thickness, (2) Alberta's regulator implementing a formulaic approach to ROE, a move Morningstar DBRS anticipates will enhance regulatory transparency and decrease regulatory lag, and (3) Arizona’s regulator approving new customer rates for electric utility in Tucson. Morningstar DBRS notes that the Iowa District Court's ruling against the state's right of first refusal (ROFR) statute has led to related transmission projects currently on hold in the state, with the timing and outcome of the proceedings uncertain. However, Morningstar DBRS does not foresee a material credit impact due to delays in capital deployment. Regulated operations in the Caribbean, Newfoundland, New York, and other jurisdictions have not experienced any material changes in their respective regulatory cost-of-service frameworks. Fortis’ largest earning contributor is independent transmission regulated by Federal Energy Regulatory Commission (approximately 1/3 of EBITDA), benefiting from timely cost recovery, stable cash flow, and favourable returns on investments with a current ROE of 10.77% (including incentive adders).

As a holding company, Fortis' credit strength depends on the quality and stability of cash flows from its subsidiaries, which remain strong and supportive. Based on the “Rating Corporate Holding Companies and Parent/Subsidiary Relationships” section under the “Morningstar DBRS Global Corporate Criteria,” Morningstar DBRS now evaluates Fortis' credit metrics solely based on consolidated figures. Morningstar DBRS continues to view Fortis's financial risk profile as being in line with the current ratings.

CREDIT RATING DRIVERS
A positive rating action may occur should the Company's business risk profile improve meaningfully from the current level while maintaining credit metrics in line with the “A” credit rating category. A negative rating action may occur should the Company's key credit metrics decline to a level no longer supportive of the current ratings for a sustained period of time (i.e., consolidated cash flow-to-debt less than 10.0%)

EARNINGS OUTLOOK
Fortis has benefitted from relatively predictable and diversified earnings underpinned by a large and diversified portfolio of investments in regulated utilities (close to 100% of consolidated EBITDA), mostly within the U.S. and Canada. The Company's consolidated EBITDA has increased meaningfully over the past five years, mostly through organic growth. Morningstar DBRS expects the Company's earnings to grow in line with growth of its rate base, with year-over-year fluctuations largely subject to the normal operations of the regulatory mechanisms and the impact of weather-related consumption.

FINANCIAL OUTLOOK
Fortis' consolidated metrics are supportive the current “A” credit rating category, with cash flow-to-debt expected to average around 12% over the next five years. Fortis has projected capital expenditures (capex) of around $25 billion for the 2024–28 period, $2.7 billion higher than the previous cycle, primarily for organic growth in its regulated operations. The capex plan will further strengthen the Company’s predominantly regulated utility portfolio. The majority of the capex is expected to be funded at the subsidiaries, and Morningstar DBRS believes Fortis is in a strong liquidity position to support its subsidiaries' working capital needs while having financial flexibility to maintain leverage at the current level. In 2023, Fortis concluded the sale of its nonregulated Aitken Creek for around $470 million, thereby further strengthening its liquidity.

CREDIT RATING RATIONALE
Fortis’ credit ratings are underpinned by the Company’s (1) large size and diversified sources of predicable and strong cash flow, (2) supportive and reasonable regulatory frameworks at regulated utilities, and (3) solid consolidated credit metrics. Credit ratings are constrained by ring-fencing at its wholly owned utilities and structural subordination.

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 Risk Factors in Credit Ratings (January 23, 2024), at https://dbrs.morningstar.com/research/427030.

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

(B) Weighting of FRA Factors
In the analysis of Fortis, 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 Fortis, 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 (April 15, 2024), https://dbrs.morningstar.com/research/431184

The following methodology has also been applied: Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186.

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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