DBRS Confirms AltaLink, L.P. at “A,” Stable Trend

DBRS has today confirmed the Senior Secured Bonds and Medium-Term Notes (Secured) and Commercial Paper of AltaLink, L.P. (ALP or the Partnership) at “A” and R-1 (low), respectively. All trends are Stable. The confirmations of the ratings are based on ALP’s low-risk regulated transmission business, a supportive regulatory environment in Alberta and the Partnership’s adequate financial profile. ALP’s regulated transmission business in Alberta accounts for 100% of total earnings.

Regulation in Alberta has remained supportive for ALP. The Alberta Utilities Commission has continued to allow ALP to use the future income tax method for calculating the federal component of income taxes and include construction work in progress (CWIP) in its rate base for Alberta Electric System Operator direct-assigned capital projects (since 2011). These credit relief measures have allowed ALP’s cash flows and credit profile to remain reasonable for its current rating category. The ratings assume that (1) these measures will continue to be in place to support ALP’s financial risk profile until its high capital expenditures (capex) level off and (2) ALP’s rate base will continue to grow favourably to support its high level of capex. Execution risk for these projects is expected to be manageable given ALP’s past success in completing large projects on time and within budget.

As a result of the ongoing high investment commitment, DBRS expects a temporary weakening of ALP’s coverage and cash flow ratios in the 2013 to 2015 period despite the treatment for CWIP. The partial deferral in the recovery of capex is primarily attributed to the mid-treatment for rate base (see DBRS Commentary: The Significant Gap Between Regulatory Rate Base and Reported Assets, dated November 16, 2012). Key financial ratios are expected to gradually recover when substantial projects are completed and fully recognized in the rate base. In 2012, ALP spent approximately $849 million on capex and generated a free cash flow deficit of approximately $690 million, which was funded through debt issuances and equity injections from its indirect owner, SNC-Lavalin Group Inc. (rated BBB (high)). DBRS expects the Partnership to continue to fund cash flow deficits in a prudent manner and maintain its leverage in line with the prescribed regulatory capital structure of 63% debt and 37% equity. In 2012, the Partnership increased its credit facilities to $1.5 billion from $0.9 billion in 2011 due to the increased liquidity required to fund its large capital program. DBRS expects this to be sufficient to accommodate higher capex and working capital requirements over the next few years.

Notes:
All figures are in Canadian 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 North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.