DBRS Confirms AltaLink Investments, L.P. at BBB, Stable Trend

DBRS has today confirmed the rating of AltaLink Investments, L.P. (AILP or the Partnership) at BBB with a Stable trend based on the strength of its 100% economic interest in AltaLink, L.P (ALP), its stable cash flow from ALP to meet financial obligations and the continued strong commitment from AILP’s indirect owners, SNC-Lavalin Group Inc. (SNC-Lavalin, rated BBB (high)) and Macquarie Transmission Alberta Ltd., to fund their future required equity calls in support of ALP’s capital build-out.

AILP’s investment in ALP, a regulated transmission utility, continues to provide the Partnership with stable cash flows in the form of distributions and interest income, which remain sufficient to cover AILP’s interest expense and operating expense as well as its distribution to its owner, AltaLink Holdings, L.P. (AHLP). Between 2011 and 2013, DBRS expects that AILP will be required to invest an estimated $450 million to $500 million annually to support ALP’s capital expenditure program. This is expected to be financed with a combination of AILP debt and equity from AHLP. DBRS notes that the size of the equity injections may vary from year-to-year depending on the timing and scale of the projects undertaken. While AILP remains committed to maintaining consolidated leverage at or near 72.5% and non-consolidated leverage of no more than 42.5%, DBRS expects some deterioration in AILP’s coverage metrics until ALP’s capital expenditures are added to the rate base.

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.

Given the increased liquidity requirements, DBRS expects AILP to increase the size of its bank line to maintain flexibility as it may need to borrow on average approximately $200 million annually between 2011 and 2013 to fund part of its equity calls.

Notwithstanding the fact that AILP’s and ALP’s ratings incorporate a host of quantitative and qualitative factors, the rating confirmation incorporates the assumption that the AUC would, if required, provide ALP with support in order to avoid ALP’s cash-flow-to-debt ratio from declining below 10.0% and the EBITDA-to-interest ratio (with interest on a gross basis based on total debt) from declining below 3 times. If the ratios were to fall below these thresholds, DBRS would review the appropriateness of both ALP’s and AILP’s ratings.

Note:
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.