Morningstar DBRS Confirms Fortis Inc.'s Credit Ratings at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Fortis Inc.'s (Fortis or the Company) Issuer Rating and Unsecured Debentures credit rating at A (low) and the Company's Preferred Shares credit 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 (accounting for approximately 99% of consolidated assets and cash flow), along with its supportive consolidated credit metrics and solid liquidity. The current credit ratings take into account Fortis' debt being structurally subordinated to the debt issued at its regulated utilities, substantially offset by the strong diversification of regulatory jurisdictions, as well as the significant size, stability, and sustainability of the Company's cash flow.

Fortis' regulatory risk profile remains strong and resilient. Regulatory frameworks in all jurisdictions continue to provide Fortis' regulated subsidiaries opportunities to prudently recover operating and capital costs and to generate predictable cash flow. Morningstar DBRS does not expect any regulatory decisions in the near term to have a material negative impact on Fortis' current business risk profile or its credit metrics. Morningstar DBRS notes a few positive developments in 2024 and year-to-date 2025, including (1) the potential reduction of regulatory lag in Arizona in light of the formula rate policy statement approved by the commission in December 2024; (2) a slight reduction of 4 basis points in return on equity (ROE) at ITC Holdings Corp.'s (ITC) MISO-based, FERC regulated transmission business that would have only a very modest impact on earnings and would still maintain strong and predictable cash flow; (3) higher ROE and equity ratios in British Columbia (2023 development) and higher ROE in Alberta; (4) all major capital projects in 2024 being well financed and on track; and (5) stronger safety and environmental records, as well as the improvement of wildfire mitigation risk management compared with prior years.

The Company's largest earnings contributor (accounting for approximately one third of EBITDA) is ITC with independent transmission continuing to benefit from timely cost recovery, stable cash flow, and favourable returns on investments. In addition, regulated operations in other jurisdictions (British Columbia, Alberta, Ontario, Prince Edward Island, Newfoundland and Labrador, New York, Arizona, and the Caribbean) have not experienced any material changes in their respective regulatory cost-of-service (COS) or performance-based rates (PBR). All major capital projects are undertaken at the regulated utility level. Over the 2025-29 period, total capital expenditures (capex) are expected to be $26 billion ($25 billion for the 2024-28 capital plan) with 99% to be invested in regulated assets.

Morningstar DBRS has reviewed Fortis' financing plan and is of the view that its financing plan, from a credit perspective, is conservative and reasonable with approximately 59% of internal generated cash flow (net of dividends), 30% debt (mostly at the utility level), and 11% equity (including dividend reinvestment program). Morningstar DBRS expects a significant increase in Fortis' rate base (which is already large at approximately $40 billion estimated for 2025) in the next few years while credit metrics are likely to improve from the 2024 level, reflecting an increase in incremental cash flow from newly completed projects and higher ROE and equity ratios in some jurisdictions.

As a holding company, Fortis' nonconsolidated credit strength remains strong, reflecting (1) the quality and stability of cash distributions from its subsidiaries (which remain strong and supportive); (2) the corporate debt level (which is modestly low); and (3) liquidity at the corporate level (which is very strong). In addition, based on the "Rating Corporate Holding Companies and Parent/Subsidiary Relationships" section in the "Morningstar DBRS Global Corporate Criteria," Morningstar DBRS now evaluates Fortis' credit metrics solely based on consolidated figures. In that respect, Morningstar DBRS continues to view Fortis' financial risk profile as being in line with the current credit ratings.

CREDIT RATING DRIVERS
A positive credit rating action may occur should the Company's business risk profile improve meaningfully from the current level while cash flow/debt attains 12.5% on a sustained basis. Although unlikely, a negative credit rating action may occur should the Company's key credit metrics decline to the level significantly below the "A" credit rating range for a sustained period or should its business risk profile deteriorate materially.

EARNINGS OUTLOOK
Fortis has benefitted from relatively strong and predictable EBITDA, which is supported by a large and diversified portfolio of investments in regulated utilities (approximately 99% 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 with the rate base increasing to approximately $39.0 billion in mid-year 2024 from $31.1 billion in mid-year 2021. With planned capital expenditures (capex) of $26 billion for the 2025-29 period expected to contribute to a significant increase in the rate base in the next few years, Morningstar DBRS expects Fortis' EBITDA to grow in line with its rate base, and the expected growth should be achieved despite year-over-year earnings fluctuations resulting from weather and some regulatory lags.

FINANCIAL OUTLOOK
Fortis' consolidated metrics should remain supportive of the current "A" credit rating category, with cash flow-to-debt expected to improve from the 2024 level, averaging around 12% or higher over the next five years. Fortis has projected capex of around $26 billion for the 2025-29 period, $1.0 billion higher than the previous cycle, primarily for organic growth in its regulated operations. As mentioned earlier, the financing plan is conservative and reasonable. The capex plan will further strengthen the Company's predominantly regulated utility portfolio. Most of the capex is expected to be funded with internal cash flow and debt at the regulated subsidiaries. Morningstar DBRS believes Fortis, from a consolidated perspective and at the corporate level, is in a strong liquidity position to support its subsidiaries' working capital needs while having the financial flexibility to maintain leverage at the current level.

CREDIT RATING RATIONALE
Fortis' credit ratings are based on the Company's large, stable, and diversified regulated utility portfolio (accounting for approximately 99% of consolidated assets and cash flow), along with its supportive consolidated credit metrics and solid liquidity. The current credit ratings take into account Fortis' debt being structurally subordinated to the debt issued at its regulated utilities, substantially offset by the strong diversification of regulatory jurisdictions, as well as the significant size, stability, and sustainability of the Company's cash flow.

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) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Fortis, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Fortis, the FRA factors are 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:
Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024) https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria https://dbrs.morningstar.com/research/447186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have 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

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

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