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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of FortisAlberta Inc. (FortisAlberta or the Company) at A (low). The trends remain Positive. The Positive trends reflect DBRS’s view of FortisAlberta’s consistently strong financial metrics (well within the “A” rating range) despite a large 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 and 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 a return on equity (ROE; 8.75% on an interim basis) on its deemed equity (41% on an interim basis) throughout the PBR term as it did in 2011 and 2012. DBRS does not expect a material change in the allowed ROE and capital structure in the upcoming regulatory decision. (2) FortisAlberta has achieved good economies of scale with a sizable customer base (530,000 customers in 2014 versus 391,000 customers in 2003). This customer base has helped the Company better control costs, which is 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 because of 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 its large capex program.

FortisAlberta’s financial profile is consistent with an “A” rating, with all credit metrics being solidly within the “A” rating range. Given that the Company has no direct access to the equity market, financial support from Fortis in a timely manner 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 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 in the first quarter of 2015, 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 (October 2014), which can be found on our website under Methodologies.