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

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 have been changed to Stable from Positive. The confirmations reflect the Company’s strong credit metrics and its low-risk business profile as a regulated distributor.

The change in trends reflects DBRS’s negative view of the regulatory framework in Alberta regarding the Alberta Utilities Commission’s (AUC or the Commission) decision on the Generic Cost of Capital (GCOC) and the decision of the Court of Appeal of Alberta to reject the Company’s appeal on the Commission’s 2013 decision on the Utilities Assets Disposition (UAD).

In March 2015, the Commission issued a decision on the GCOC and lowered the Company’s return on equity (ROE) to 8.30% from 8.75% and the deemed equity to 40% from 41%. The decision took effect retroactively to 2013 and 2014. Although, the lower ROE and deemed equity only apply to the portion of based rates that are funded by revenue provided by mechanisms separate from the formula and should not have a material impact on the Company’s overall cash flow, it was viewed as modestly credit negative since Alberta now has one of the lowest ROEs compared with other Canadian jurisdictions.

In September 2015, the Court of Appeal of Alberta denied the appeal brought by five utilities in Alberta (including FortisAlberta) regarding the Commission’s’ decision on the UAD. In 2013, the Commission issued a decision concluding that the shareholders of utilities, not the ratepayers, will bear the costs of stranded assets, which are assets that become incapable of being used to provide services to ratepayers due to some extraordinary event. Stranded assets would have to be removed from the rate base. DBRS continues to view potential UAD events as being low probability but with high impact.

DBRS notes that while these two above decisions are modestly negative to the credit profile of the Alberta utilities, the potential impact is not sufficient to warrant a negative rating action on the utilities in the province. That said, a Positive trend is no longer appropriate within the context of DBRS’s view of the regulatory framework in Alberta. Further unfavourable regulatory decisions in the future could warrant negative rating actions for this and other Alberta-based regulated utilities.

The Company’s A (low) rating continues to be supported by its low business risk and growing and relatively predictable cash flow from its regulated distribution operations. In addition, the new regulatory capital structure of 40% equity is still consistent with DBRS’s “A” rating category as it still provides a strong cushion for the indebtedness in the capital structure.

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 2015), which can be found on our website under Methodologies.