DBRS Confirms FortisAlberta Inc. at A (low), Changes Trends to Positive

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt of FortisAlberta Inc. (FortisAlberta or the Company) at A (low). However, DBRS has changed the trends to Positive from Stable. The Positive trends reflect DBRS’s view of FortisAlberta’s consistently strong financial metrics (well in the “A” rating range) despite a large capital expenditures (capex) program. DBRS expects that the Company will continue to maintain its strong financial profile under the Performance Base Regulation (PBR) that commenced January 1, 2013.

FortisAlberta’s business risk profile is reflective of an “A” rating, which is supported by the following factors: (1) The regulatory regime in Alberta remains supportive, with the five-year PBR period that commenced January 2013. Under the PBR framework, the Company is still afforded the same opportunity to earn the return on equity (8.75%) on its deemed equity (41%) throughout the PBR term, as it did in 2011 and 2012. (2) FortisAlberta has achieved good economies of scale, with a sizable customer base (518,000 customers in 2013 versus 391,000 customers in 2003). This customer base helps the Company to better control costs, which are critical since the Company’s annual revenue increases are subject to, among other things, a productivity factor set in the PBR formula. (3) The Company has no commodity price risk, while volume risk remains modest due to the pattern of consumption in its franchise. (4) FortisAlberta has consistently benefited from financial support from its parent, Fortis Inc. (Fortis; rated A (low)) for the financing of the equity portion of a large capex program.

FortisAlberta’s financial profile is indicative of an “A” rating, with all credit metrics being solidly within the “A” rating range. Financial support from Fortis is important, as the Company is expected to continue 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, as well as the replacement and refurbishment of aging distribution infrastructure. DBRS expects Fortis to continue providing financial support in a timely manner. DBRS also expects the Company to continue to maintain debt leverage in line with the regulatory capital structure. DBRS acknowledges that there are some uncertainties associated with the regulatory decision on capital trackers. However, the final regulatory decision is expected to be issued later in 2014, and DBRS does not expect any materially negative impact on the Company’s credit profile. Following the resolution of the capital tracker, the ratings of FortisAlberta are expected to be upgraded to “A” with Stable trends.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (January 2014), which can be found on our website under Methodologies.