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

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

The rating confirmations reflect (1) Fortis’ strong consolidated and nonconsolidated credit metrics, solid liquidity, and stable regulatory and business risk profile in 2021 and (2) DBRS Morningstar’s expectation that Fortis will continue to maintain its strong credit profile in 2022 and over the medium term. The current ratings take into account Fortis’ debt being structurally subordinated to the debt issued at its regulated utility levels. DBRS Morningstar also considers mitigating factors to the structural subordination such as the diversification of regulatory jurisdictions, as well as the significant size, stability, and sustainability of cash flow. Furthermore, the current ratings incorporate potential risks associated with regulatory lags, operational disruptions, and capital project executions at the Company’s regulated utilities.

DBRS Morningstar recognizes that the ongoing Coronavirus Disease (COVID-19) pandemic did not have a material impact on Fortis’ 2020 and 2021 financial performance, operations, and major capital projects. Most of Fortis’ assets are essential services.

From a regulatory perspective, there have not been material changes since DBRS Morningstar’s last rating review in May 2021. Regulated utilities in British Columbia are in their third year of the Multiple-Year Rate Plan (2020–24), which is similar to the 2013–19 Performance Base Regulation. Alberta’s regulated operations continued to earn one of lowest returns on equity (ROE) among all Fortis’ regulated utilities. However, the regulator has initiated proceedings to establish cost of capital parameters for 2024 and beyond. Regulated operations in the Caribbean, Newfoundland, New York, and Arizona have not experienced any material changes in their respective regulatory cost-of-service frameworks. ITC Holdings, a transmission company that Fortis acquired in 2016, continues to benefit from timely cost recovery; good return on its investments; and stable cash flow with a ROE currently at 10.77% (including incentive adders), compared with the previous all-in ROE of 10.63%.

With respect to Fortis’ financial risk profile, its modified-consolidated metrics have remained strong and stable, benefitting from stable performance and growing rate bases at its subsidiaries. Fortis’ strong modified-consolidated metrics reflect the fact that all of the Company’s regulated utilities tend to maintain their capital structures in line with the regulatory capital structure or deemed equity and that their capital expenditures (capex) financing has been reasonable to maintain their credit metrics. The solid nonconsolidated metrics reflect a significant reduction in corporate debt since 2019 and strong cash flow available for distributions at its subsidiaries. Fortis’ corporate debt decreased to approximately $4.0 billion at the end of 2021 from $5.4 billion in 2018. As a result, Fortis’ nonconsolidated metrics (as calculated by DBRS Morningstar) have strengthened since 2018. DBRS Morningstar expects Fortis’ leverage level to remain stable over the medium term as there are currently no material financing requirements at the corporate level. Fortis expects to benefit from incremental cash flow at its subsidiaries as a result of a substantial capex program over the next five years.

With respect to capital projects, Fortis plans its growth over the next five years to be mostly organic. Capital spending of $3.6 billion in 2021 was consistent with Fortis’ plan for the year and was reasonably financed at its regulated utilities. Capex for the 2022–26 period increased modestly to $20 billion from $19.6 billion for the 2021–25 period. Approximately 99% of capex will be spent on regulated operations. As a result, Fortis’ regulated rate base, approximately $31.1 billion at midyear 2021, is expected to grow to approximately $41.6 billion in 2026. This will further strengthen Fortis’ business risk profile as its operations will become larger and more diversified. Fortis plans to fund most of its capex program at its regulated utility level. The required funds will mainly be financed with subsidiaries’ internally generated cash flow (net of dividends to Fortis), debt issued at the subsidiaries, and a corporate dividend reinvestment program (which is common equity). DBRS Morningstar considers the financing plan to be reasonable and believes that the plan should not have a material impact on Fortis’ credit metrics (both nonconsolidated and modified-consolidated) in the near to medium term.

DBRS Morningstar believes that a positive rating action will not be likely in the medium term. However, DBRS Morningstar would take a negative rating action if Fortis’ (1) business risk profile deteriorates significantly from a weakening of the credit quality of its major subsidiaries or as a result of material acquisitions, which is unlikely based on Fortis’ current expansion plan; (2) modified-consolidated metrics fall below the “A” rating range for a sustained period; or (3) nonconsolidated metrics materially weaken from the current level, especially if its nonconsolidated debt-to-capital increases substantially to around the 30% range on a long-term basis.

ESG CONSIDERATIONS
There was no environmental, social, or governance factor or consideration with a significant or relevant impact on the credit ratings.

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/373262.

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 24, 2021; https://www.dbrsmorningstar.com/research/384922); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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@dbrsmorningstar.com.

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

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