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

DBRS has today confirmed the Senior Secured Bonds and Medium-Term Notes rating of AltaLink, L.P. (ALP or the Partnership) at “A” and its Commercial Paper rating at R-1 (low), both with Stable trends. The rating confirmations reflect the Partnership’s low level of business risk from its regulated electric transmission business and currently strong financial profile, underpinned by its stable capital structure and reasonable credit metrics. The ratings also incorporate ALP’s potentially significant capital expenditures and the associated increased business risk as well as the continued support from both the Alberta Utilities Commission (AUC) and ALP’s indirect owners, SNC-Lavalin Group Inc. and Macquarie Transmission Alberta Ltd.

ALP’s financial profile remained strong and stable for the 12 months ended September 30, 2010, due to growth in its rate base and the effect of regulatory tariff decisions received from its 2009–2010 General Tariff Application (GTA) and the AUC’s 2009 Generic Cost of Capital (GCC) decision. The Partnership’s rate base continues to grow, necessitated by both capital replacement and upgrade projects and Alberta Electric System Operator (AESO) direct assigned expansion projects. ALP’s gross capital expenditures for 2010 are forecast to be approximately $550 million ($338 million year to date) and are expected to increase significantly in the 2011 to 2013 time frame.

ALP’s business risk profile is expected to increase over the medium term as a result of the number of significant capital projects assigned to it by the AESO, which will require prudent support from the AUC in order to preserve the credit profile of the Partnership.

According to the recently filed 2011–2013 GTA, ALP’s planned capital expenditure program of approximately $1 billion in 2011, $1.5 billion in 2012 and $2.0 billion in 2013 is expected to result in significant free cash flow deficits during the build-out period, placing pressure on the balance sheet and coverage ratios until projects are completed and added to the rate base. The two largest components of ALP’s future capital expenditures that could account for approximately half of the total forecast spending are the Edmonton-Calgary high-voltage direct current line and projects associated with the potential tie-in of southern Alberta wind generation.

ALP argued in its 2011–2013 GTA that the fundamental cause of the credit metrics pressure is the debt incurred to finance direct assigned projects during construction. The credit metrics pressure is intensified by the combined effect of the volume of construction work in progress (CWIP) relative to the rate base and the amount of debt used to finance CWIP. ALP forecasts that approximately $1.3 billion of debt would not be serviced by cash flow under conventional CWIP accounting in 2013. DBRS notes that the relief levels approved by the AUC may vary from what ALP is currently proposing. A decision is not expected until late 2011. However, we expect some form of support from the AUC to help alleviate some of the pressure on the credit metrics and ratings related to the capital build-out.

The 2009–2010 GTA decision contained a number of elements supportive of ALP’s credit profile and made several statements in support of ALP’s credit rating. The AUC stated that it accepted ALP’s capital build-out forecast and, notably, agreed that it was in ratepayers’ interests for ALP to maintain its credit rating. In the 2011–2013 GTA, the Partnership has applied for the following relief to support its credit metrics in the build-out stage: the continuation of the future income tax method used in the calculation of the federal component of income taxes (rather than the flow-through income tax method); the approval of CWIP in rate base for all direct assigned capital projects; and a temporary increase in the common equity ratio to 38% in 2012 and 40% in 2013 from the current approved level of 36%. The AUC stated in its 2009 decision that its preferred method of addressing the credit metrics pressure was the suspension of normal CWIP accounting procedures; however, ALP believes that measure in itself is not sufficient to sustain its cash flow-to-debt ratio greater than 10% and that a combination of CWIP in rate base treatment and a temporary increase in common equity as outlined above may be needed.

Significant external funding is required to finance the potentially sizable free cash flow deficits expected over the near to medium term. ALP is committed to financing the deficits through new debt (estimated to average approximately $700 million per year from 2011 to 2013) and equity injections from its owners, depending on the timing and scale of the projects. Maintaining adequate access to the public debt markets (term and commercial paper) is critical to the Partnership during this key build-out phase. DBRS believes the owners have the financial wherewithal and the commitment to fund the equity portion of ALP’s projects.

Liquidity requirements are expected to increase considerably to accommodate higher capital expenditures and working capital requirements. DBRS notes that the credit facilities as they stand today are not expected to be adequate to support the proposed capital expenditures over the next few years and that the need for appropriate levels will have to be addressed. In its 2011–2013 GTA, the Partnership is forecasting its credit facilities will increase to $1.4 billion in 2011, $2.2 billion in 2012 and $2.4 billion in 2013.

Notwithstanding the fact that ALP’s ratings incorporate a host of quantitative and qualitative factors, the rating confirmations assume that the AUC would, if required, provide ALP with support to prevent ALP’s cash flow-to-debt ratio from declining below 10% and the EBITDA-to-interest ratio (with interest on a gross basis based on total debt) from declining below 3.0 times. If the ratios were to fall below these thresholds, DBRS would review the appropriateness of the “A” rating.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.