DBRS Morningstar Confirms Ratings of FortisAlberta Inc. at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of FortisAlberta Inc. (FAB or the Company) and the rating of its Senior Unsecured Debt at A (low). The trends are Stable. The confirmations reflect the Company’s relatively stable and solid credit metrics in the last 12 months ended September 30, 2020, and DBRS Morningstar’s expectation that the Company’s credit metrics will remain stable over the medium term. The confirmations also reflect a stable second Performance-Based Regulation (PBR) term from 2018 to 2022, which determines FAB’s annual distribution rates based in a formula that incorporates an inflation factor and a productivity factor (assumed and set for each year by the regulator) and the PBR framework provides incentive for FAB to earn a return on equity (ROE) above the allowed ROE (see below). The ratings of FAB are supported by (1) no exposure to commodity price risk, (2) limited volume risk, (3) manageable regulatory risk, and (4) operating efficiency and reliability.

The confirmations also incorporate the positive outcome of the November 4, 2020, decision issued by the Alberta Utilities Commission (AUC). In this decision, FAB will not have to transfer approximately $403 million (approximately 11% of the 2020 rate base) of the unamortized contributions associated with past investments under the Alberta Electric System Operator’s (AESO) customer contribution policy (ACCP) to AltaLink Management Ltd (AltaLink). This is the final resolution to the decision in September 2019 by the AUC. In the September 2019 decision, the AUC initially approved a change to the method in which the ACCP was accounted for between distribution facility owners and transmission facility owners (TFO). As part of this earlier decision, FAB would be required to transfer the unamortized AESO contributions of $403 million associated with the ACCP investment to AltaLink, which is the incumbent TFO in FAB’s service area.

FAB’s business risk profile has remained relatively stable. The ongoing Coronavirus Disease (COVID-19) has had no material impact on FAB’s financial and operational performance to date in 2020. This is because the Company provides an essential service and operates critical infrastructure to the Province of Alberta’s (rated AA (low) with a Negative trend by DBRS Morningstar) economy. In March 18, 2020, the Alberta government announced a utility payment deferral program (UPDP) to help residential, farm, and small commercial customers to alleviate financial hardship during the pandemic. The program ended on June 18, 2020. Under the UPDP, customers who were unable to pay their utility bill were able to defer payment for up to 90 days. The energy-retail utilities, not distribution utilities, have accumulated the cash flow impacts and related carrying costs of the uncollected delivery and distribution charges under the UPDP for future recovery through regulatory mechanisms. As a result, the deferral of distribution charges has no impact on the Company’s cash flow.

The allowed ROE and equity component of the regulatory capital structure for 2021 will likely be unchanged from 2020 and 2019 at 8.5% and 37%, respectively, and remain one of the lowest in North America. FAB is in the third year of the five-year PBR term, which is similar to the first PBR term (2013–2017) with respect to the mechanism used to calculate annual distribution rate increases. However, 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 funding 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. Most of FAB’s capital expenditure in 2020 and over the medium term is Type 2 capital funding.

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 under the PBR framework. Based on FAB’s financing plan and a high degree of visibility of cash flow, DBRS Morningstar expects FAB’s credit metrics to remain stable over the medium term and continue to support the current ratings.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (October 27, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 addi¬tional 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.

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