DBRS Morningstar Confirms FortisAlberta Inc. at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Unsecured Debt rating of FortisAlberta Inc. (FAB or the Company) at A (low). Both trends remain Stable. The confirmations reflect the Company’s stable and solid credit metrics in the first nine months of 2019. The ratings continue to be supported by FAB’s strong business risk profile as a regulated electricity distributor within a reasonable regulatory framework with no commodity-price risk and a good capital cost-recovery mechanism.

On September 22, 2019, the Alberta Utilities Commission (AUC) issued a decision to approve the change to the method in which the Alberta Electric System Operator’s (AESO) customer contribution policy (ACCP) is accounted for between distribution facility owners and transmission facility owners (TFO), (the Decision). As part of the Decision, the AUC determined that FAB would transfer the unamortized AESO contributions of $403 million (approximately 11% of the 2019 rate base) associated with the ACCP investment made by FAB to AltaLink Management Ltd (AltaLink), which is the incumbent TFO in FAB’s service area (the Transfer). The implementation of the Decision is suspended by the AUC following FAB’s request, pending further review. The Stable trends incorporate DBRS Morningstar’s view that even if FAB will have to make the Transfer to AltaLink, the Transfer will not result in a material impact on FAB’s credit metrics. DBRS Morningstar expects FAB to use part of the proceeds from the Transfer to reduce its debt and to maintain its capital structure in line with the regulatory capital structure. However, if the Transfer occurs and if the debt is not reduced accordingly (which is unlikely), FAB’s credit metrics will be negatively affected.

Notwithstanding the Decision, FAB’s business risk profile has remained relatively stable since DBRS Morningstar’s last rating review. The allowed return on equity and equity component of the regulatory capital structure for 2020 will remain the same as in 2018 and 2019 at 8.5% and 37%, respectively. FAB is in the second year of the second performance-based regulation (PBR) term, which is similar to the first PBR term in that an increase in annual electricity distribution rates is based on the distribution rates in the preceding year adjusted for estimated inflation (I) and an estimated productivity factor (X) or the preceding year’s distribution rates plus I-X. This means that if the operating costs rises faster than the revenue increase based on I-X for any particular year, earnings and cash flow would be negatively affected. The I-X of 1.06% is applied for 2020. DBRS Morningstar notes that the capital funding mechanism is distinct from the first PBR in that the Type 2 incremental capital funding is based on historical average capital additions (Type 1 capital captures the incremental funding under extraordinary circumstances). This would result in higher uncertainties with respect to capital cost recovery if the Company’s future Type 2 capital funding additions are higher than the historical average.

Despite low going-in rates for the basing year (2018), FAB’s good performance under the second PBR term to date has resulted in solid credit metrics because of its consistent operational reliability and its ability to manage controllable operating costs, which account for approximately 60% of total operating costs (excluding depreciation and amortization). Based on FAB’s financing plan and a high degree of visibility of cash flow, DBRS Morningstar expects FAB’s credit metrics, besides the Transfer, to remain stable over the medium term and continue to solidly support the current ratings.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relations, 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 Morningstar had access to the accounts and other related internal documents of the rated entity or its related entities in connection with this rating action.

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@dbrs.com.

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