DBRS Updates Its Report On FortisAlberta Inc.

DBRS has today updated its report on FortisAlberta Inc. (FortisAlberta or the Company). The credit profile of FortisAlberta has remained stable based on the latest financial results and regulatory development in Alberta. The Company’s rating reflects its low business risk, which stems from the regulated nature of its operations supported by a reasonable, albeit evolving, 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 reasonable 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. FortisAlberta has no exposure to power price risk, as the Company does not directly provide retail services to end users. Alberta is moving toward performance based regulation (PBR) in 2013 from the current cost-of-service system. The current rating is based on DBRS’s expectation that the change in the regulatory framework will not have a material impact on the credit profile of FortisAlberta.

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 the last 12 months ended March 2012 (LTM 2012) remained stable and within DBRS’s 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.

Note:
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.