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

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

The Company’s business risk profile is viewed as strong, as virtually all of its earnings are generated from the regulated electricity distribution business, which operates under a reasonably stable regulatory framework in Alberta (regulated by the Alberta Utilities Commission (the AUC)). The Company is allowed to earn a return on equity (ROE) of 8.75% on a deemed equity ratio of 41% and to recover prudently incurred capex in a timely manner. In addition, the Company has no exposure to power price risk, as the Company does not directly provide retail services to end users. Although the Company is exposed to increases in actual operating costs that are in excess of estimated costs embedded in the rates (allowed by the AUC), DBRS views this risk as manageable.

FortisAlberta’s financial profile has been solid, supported by strong and growing earnings and cash flow, as well as reasonable debt leverage. The growth in earnings has benefited from a favourable franchise area, which has experienced robust growth over the past decade. The Company’s large customer base (approximately 500,000 customers) provides the Company with operating efficiency, further supporting its profitability under the current regulatory regime. FortisAlberta’s credit ratios for 2011 remained stable and within DBRS’ A (low) rating category.

FortisAlberta continues to generate free cash flow deficits as a result of the ongoing large capital expenditure spending on the expansion of its distribution network to facilitate growth in its service area and the replacement and refurbishment of aging distribution infrastructure. The Company has financed its capital expenditures with a balanced mix of equity injection from its parent (Fortis Inc., rated A (low)) and debt issuances. As a result, FortisAlberta was able to maintain its balance sheet leverage in line with its current rating range. DBRS expects the parent to continue to inject equity to partially finance the Company’s future cash flow deficits.

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.