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

DBRS has today confirmed both the Issuer Rating and the Senior Unsecured Debt of FortisAlberta Inc. (FortisAlberta or the Company) at A (low), with a Stable trend. The confirmation reflects FortisAlberta’s low business risk, which stems from the regulated nature of its operations, supported by a reasonable, albeit evolving, regulatory environment; a favourable franchise area; and its solid 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)). In September 2012, the AUC approved the transition to performance-based regulation (PBR) from the current cost-of-service framework, for a five-year term beginning on January 1, 2013, for distribution utilities in Alberta. The new PBR framework is not expected to have a material impact on the credit profile of FortisAlberta; however, the uncertainty regarding the capital tracker mechanism for the recovery of certain capital expenditures (capex) could potentially increase regulatory risk. More clarity will be provided following the AUC’s decisions on the Company’s capital tracker applications (expected in Q3 2013).

FortisAlberta’s financial profile has been solid for the past few years, supported by strong and growing earnings and cash flow, as well as reasonable debt leverage. The growth in earnings has benefited from a strong and favourable franchise area, which has experienced robust growth over the past decade. This is expected to continue to support FortisAlberta’s rate base growth. In 2012, FortisAlberta’s key credit ratios remained solid for its current rating category.

FortisAlberta continues to generate free cash flow deficits as a result of the ongoing large capex 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 historically financed its capex with a balanced mix of equity injection from its parent (Fortis Inc.; rated A (low)) and debt issuances to maintain its balance sheet leverage in line with its current rating. DBRS expects the parent to continue to inject equity to partially finance the Company’s future cash flow deficits, if required.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.