DBRS Confirms AltaLink, L.P. at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS) confirmed the ratings of AltaLink, L.P.’s (ALP or the Company) Medium-Term Notes (Secured) at “A” and Commercial Paper (CP) at R-1 (low), both with Stable trends. The confirmations reflect ALP’s low-risk regulated transmission business in Alberta, supported by a reasonable regulatory environment. The transmission business accounts for 100% of ALP’s earnings and assets. Financial metrics, which DBRS viewed as temporarily stressed due to high capital expenditures (capex) as part of the Alberta Electric System Operator’s (AESO) directed build program, have returned to levels consistent with the rating category this year as the program winds down.

DBRS views the quality of the regulatory regime in Alberta as supportive of the current ratings because of the high level of cost recovery certainty and downside protection under normal operating conditions. The Alberta Utilities Commission’s (AUC) Generic Cost of Capital (GCOC) decision for 2016 and 2017 increased ALP’s allowed return on equity (ROE) to 8.5%, and raised its equity thickness to 37%, bringing regulatory parameters closer to comparable North American peers. DBRS expects this will lead to improved cash flow and profitability on the Company’s expanded rate base. The terms of the approved negotiated settlement between ALP and intervenors for the 2017–2018 General Tariff Application are also reasonable and credit neutral, committing ALP to modest operations cost reductions over two years and a rate refund of $31 million spread between 2017 and 2018. Upcoming decisions before the regulator are (1) the Direct Assign Capital Deferral Account (DACDA) application, where ALP is seeking final approval for inclusion of almost $2 billion of capital additions from 2014 and 2015 into the rate base, and (2) the GCOC process for 2018–2020, which commenced in 2017. DBRS believes that any weakening of regulatory parameters, such as a disallowance of a material amount of capex in the DACDA, or reduction of either approved ROE or deemed equity, could put negative pressure on ALP’s credit quality.

Although Alberta’s economy is showing signs of improvement due to gradually firming oil prices, the AESO’s load forecasts were adjusted downward in its latest long-term outlook, which may result in some near-term excess transmission capacity. ALP’s growth capex is expected to normalize over several years. Given the tariff relief measures approved by the AUC, operating cash flow will grow at a slower pace and DBRS expects the cash flow-to-debt ratio will be between the “A” and BBB range over the near term. All other metrics, however, are expected to remain in the current rating category.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.

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