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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of FortisAlberta Inc. (FAB or the Company) and the rating on its Senior Unsecured Debt at A (low). The trends on both ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
FAB's ratings are largely based on the Company's pure-play regulated electricity distribution operations, the reasonable regulatory regime under the Alberta Utilities Commission (AUC), and solid credit metrics in the "A" rating range.

There has been no material change in Alberta's regulatory framework since the last review. The AUC approved a new formulaic approach to return on equity (ROE), which Morningstar DBRS views as modestly positive for reducing regulatory lag. FAB is in the first year of the third-generation performance-based regulation (PBR) term (2024-28). In January 2024, the AUC approved distribution rates for 2024, which included a rate increase of approximately 9%. This increase reflected inflation, the rise in the approved ROE to 9.28% from 8.5%, and the inclusion of PBR revenue from the efficiency carry-over mechanism (ECM) following the conclusion of the second PBR term. In September 2024, FAB submitted its 2025 distribution rates application, proposing a 3.8% increase primarily reflecting I-X escalation and k-bar placeholder. The AUC's decision on the application is expected by the end of the year.

Morningstar DBRS notes that the Company incurred approximately $12 million in costs related to the 2023 wildfires that did not meet the Z-factor criteria for recovery. These costs were managed under the previously approved capital balances that are intended to address events such as these that occur in the normal course of operations. This outcome has had no material impact on the Company's credit metrics and aligns with Morningstar DBRS' expectation in the last review.

CREDIT RATING DRIVERS
A positive rating action could occur if FAB's credit metrics continued to strengthen (e.g., a cash-to-debt ratio improved to 16%), assuming the regulatory framework in Alberta remains unchanged. Although it is unlikely, a negative rating action may occur should Alberta's regulatory framework, FAB's business risk profile, or its credit metrics deteriorate meaningfully for a sustained period (e.g., a cash flow-to-debt ratio below 12.5%).

EARNINGS OUTLOOK
FAB's earnings have benefitted from consistent operational efficiency, as evidenced by the Company achieving ROEs above the approved levels during the second PBR term. Morningstar DBRS expects the Company to maintain similar levels of efficiency gains through the third PBR term, leading to steady earnings growth in the medium term, supported by rate-base growth, customer additions, and increased demand. Additionally, earnings in 2024 should benefit from the higher approved ROE and the extra PBR revenue from the ECM after the end of the second PBR term.

FINANCIAL OUTLOOK
FAB's key credit metrics remain solid and relatively stable and are expected to remain in line with the "A" rating range over the medium term. The Company anticipates capital expenditures (capex), net of customer contributions, to average $600 million annually over the next five years, reflecting an increase of more than 30% compared to the previous cycle. Morningstar DBRS expects FAB will continue to fund its capex consistent with its historical financing plan in which capex is financed with internally generated cash flow after dividends, new debt issuances, and, if needed, equity injections from the parent. All else equal, Morningstar DBRS would consider taking a positive rating action if the Company achieves and is expected to maintain cash flow-to-debt of 16%.

CREDIT RATING RATIONALE
FAB's credit ratings are supported by the reasonable regulatory framework, the Company's operational reliability and efficiency, and solid credit metrics. These are offset by a customer mix with a relatively greater proportion of industrial customers and by regulatory risk, such as the stranded-asset risk associated with the Utility Asset Disposition policy.

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 FAB, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of FAB, 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 FAB, 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 (June 27, 2024), https://dbrs.morningstar.com/research/435127

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 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