DBRS Confirms Fortis Inc. at BBB (high) and Pfd-3 (high) with Stable Trends

DBRS Limited (DBRS) confirmed Fortis Inc.’s (Fortis or the Company) Issuer Rating and Unsecured Debentures rating at BBB (high) and the rating of the Company’s Preferred Shares at Pfd-3 (high). All trends remain Stable.

The confirmations reflect (1) significantly lower non-consolidated corporate debt following the sale of Waneta Hydroelectric Expansion (the Waneta Expansion); (2) low-risk regulated assets, which are expected to grow meaningfully over the next few years; and (3) stable consolidated credit metrics in 2018 and Q1 2019. The current ratings take into account Fortis’s structural subordination and mitigation factors, such as the diversification of regulatory jurisdictions and the size, stability and sustainability of cash flow.

Fortis’s corporate debt was significantly reduced following the closing of the $1.0 billion sale of the Waneta Expansion in April 2019 with proceeds used to repay its credit facilities and corporate long-term bonds. DBRS’s pro forma cash flow and debt/capital ratios (on a non-consolidated basis) improved from the solid 2018 level. The pro forma non-consolidated leverage post-April 2019 is in the low 20% range (approximately 26.5% in 2018), which is reasonable from a holding company’s leverage perspective. This leverage level is expected to remain stable over the medium term since there are currently no substantial financing requirements at the corporate level.

The Company’s business risk profile remains strong following the sale of the Waneta Expansion, with approximately 99% of operating cash flow for 2019 expected to be generated from regulated utilities. Fortis’s regulated utilities operate in several jurisdictions (five Canadian provinces, nine U.S. states and three Caribbean countries), providing Fortis with significant regulatory diversification. Overall, these regulatory frameworks remained stable in 2018 despite a reduction in earnings at ITC Holdings Inc. (ITC; a transmission utility) because of U.S. Tax Reform. However, this earnings impact is modest within the context of Fortis’s consolidated cash flow. Additionally, Fortis also benefits from its business diversification as its regulated operations consist of low-risk electric transmission, distribution, generation and gas distribution. The size and the regulatory diversification also provide Fortis with significant flexibility with its capex planning.

Fortis’s growth over the next few years is expected to be mostly organic. The Company’s capex plan for the 2019–2023 period is approximately $17.3 billion (approximately $3.45 billion per year), of which 99% will be spent in the regulated business. As a result, Fortis’s rate base is expected to increase to approximately $35.5 billion in 2023 from approximately $26.1 billion in 2018. This will further strengthen Fortis’s business risk profile. However, DBRS notes that the projects entail execution risk for Fortis. DBRS expects the Company to complete these projects on time and within their respective budgets.

Fortis plans to finance its capex program at the operating utility level. A majority of the funds is expected to be from internally generated cash flow with the remainder expected to be financed with subsidiary debt and non-core asset sales.
Based on Fortis’s financing strategy, DBRS expects the Company’s consolidated metrics to remain relatively stable from the current level and its non-consolidated metrics to improve. If Fortis can (1) maintain its current business risk profile; (2) maintain its consolidated metrics stable at the 2018 level; and (3) sustain its non-consolidated debt/capital and non-consolidated cash flow/debt ratios in the low 20% range and at least 12.5%, respectively, DBRS could consider a positive rating action. DBRS believes that a negative rating action is unlikely at this time.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2018), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS 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 info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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