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

DBRS has today confirmed the rating of FortisAlberta Inc.’s (FortisAlberta or the Company) Senior Unsecured Debt at A (low), with a Stable trend. The rating confirmation reflects FortisAlberta’s low business risk stemming from the regulated nature of its operations, the stable regulatory environment, favourable franchise area and the Company’s relatively stable financial profile.

Along with the other Alberta utilities, FortisAlberta has witnessed some supportive regulatory decisions over the past couple of years, including a modest increase to the allowed return on equity (ROE) to 9% and its deemed equity ratio increased to 41%. For 2011, FortisAlberta is operating under an interim rate of 9% and the Alberta Utilities Commission (the AUC) is considering a review of the ROE-setting methodology for 2012 and whether a formula-based approach is required.

In December 2010, the AUC issued a decision approving the 2010 and 2011 Distribution Revenue Requirement amounts of $346.0 million and $368.3 million, respectively. FortisAlberta is operating under an interim ROE for 2011. The Company submitted a 2012 and 2013 Cost of Service (COS) Application in March 2011.

FortisAlberta has historically demonstrated strong and stable growth in EBITDA and EBIT, reflective of its expanding customer base and rate base, improving ROEs and deemed equity. The regulatory decisions and growth in rate base will likely improve FortisAlberta’s financial profile going forward.

FortisAlberta continues to witness free cash flow deficits as a result of the large ongoing capital expenditure program. The focus of the capital expenditures is on the expansion of the Company’s distribution network to facilitate growth in FortisAlberta’s service area, the replacement and refurbishment of aging distribution infrastructure, as well as on the installation of automated meters. Capital expenditures over the medium term are expected to remain high at approximately $350 million to $400 million (before customer contributions). FortisAlberta is expected to finance the cash flow deficits with a combination of incremental debt financing and equity injections from parent company Fortis Inc. (Fortis; rated A (low)). FortisAlberta is expected to maintain a reasonably stable credit metrics in line with the current rating category.

The Canadian Accounting Standards Board is giving qualified regulated entities the option to defer by one year their International Financial Reporting Standards conversion date. FortisAlberta has elected to defer, and is also considering a change to U.S. Generally Accepted Accounting Principles.

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

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