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

DBRS Limited (DBRS) confirmed the rating of Altalink, L.P.’s (ALP or the Company) Medium-Term Notes (Secured) at “A” and the rating of the Company’s Commercial Paper at R-1 (low). DBRS also assigned an Issuer Rating of “A” to ALP. All trends are Stable. The ratings reflect ALP’s low-risk regulated transmission business in Alberta, which is supported by a reasonable regulatory environment. The transmission business accounts for 100% of ALP’s earnings and assets. ALP’s financial metrics have normalized within the expected range of the rating category.

DBRS views the quality of the regulatory regime in Alberta as generally supportive of the current ratings. The Alberta Utilities Commission’s (AUC) Generic Cost of Capital (GCOC) decision for the 2018–2020 period maintained ALP’s current allowed return on equity at 8.5% and equity thickness at 37.0%, upholding the levels set in the 2016–2017 GCOC, which recognized certain business risks resulting from the ongoing Utility Asset Disposition (UAD) issue. The AUC further approved ALP’s request to open discussions with intervenors regarding a negotiated settlement of the 2019–2021 General Tariff Application (GTA) filing. The GTA filing commits ALP to holding the tariff rate for ratepayers flat for three years as part of the Company’s commitment to a five-year rate freeze. The Company plans to accomplish this objective by holding operating spend at the current level (with the exception of salaries, wages and IT licenses), transitioning to a new approach for salvage recovery and continuing the use of flow-through income-tax recovery. This will mark the second time that the AUC has approved a negotiated settlement approach to the GTA, which DBRS believes is indicative of the AUC’s willingness to address the issue of regulatory lag.

UAD and stranded asset cost remain a potential outstanding issue. Draft legislation introduced by the Government of Alberta (the Government) in April 2018 following an industry consultation process was intended to address the uncertainty around this issue. However, the Government withdrew the legislation in May 2018 after acknowledging multiple stakeholder concerns with the wording. DBRS will continue to monitor developments in this area and maintains a below-average view of the stranded cost recovery regulatory factor.

Given the AESO’s reduced long-term load forecasts released in its 2017 Long-term Outlook, ALP is likely to see only minimal growth in its rate base over the medium term, particularly given the recently completed build-out. As a result, ALP’s growth capex is projected to normalize at $100 million to $200 million annually. Cash flow is benefiting from this lower capex and from the regulatory parameters confirmed by the AUC in its 2018–2020 GCOC decision issued in November 2018.

Given ALP’s public commitment to hold its tariff constant over the next five years, as well as rate-payer relief measures previously approved by the AUC, operating cash flow will grow at a slower pace, and DBRS expects the cash flow-to-debt ratio to be toward the lower end of the “A” range over the near term. The ratings incorporate financial projections from ALP (which include the 2018–2020 approved parameters) and assume that extra cash, which is not required to maintain the regulatory capital structure, will flow up to the parent company, AltaLink Investments, L.P. (AILP; rated BBB (high) with a Stable trend by DBRS). A ratings upgrade is unlikely given the near-term limited growth in cash flow while a ratings downgrade could be driven by an unfavourable change in regulatory parameters.

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 and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, 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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada