DBRS Confirms AltaLink, L.P. at “A,” R-1 (low), Stable

DBRS Limited (DBRS) has today confirmed the ratings of AltaLink, L.P.’s (ALP or the Company) Medium-Term Notes (Secured) at “A” and Commercial Paper (CP) at R-1 (low), both with Stable trends. The confirmation reflects ALP’s low-risk regulated transmission business in Alberta, supported by a reasonable regulatory environment. The transmission business accounts for 100% of ALP’s earnings and assets. However, the ratings are constrained by ALP’s relatively weak financial metrics, particularly the cash flow-to-debt and interest coverage ratios, which are in the BBB rating range.

DBRS views the quality of the regulatory regime in Alberta as still being supportive of the current ratings because of the high level of cost recovery certainty and downside protection under normal operating conditions, which mitigate the negative effects from a lower deemed return on equity (ROE) and equity thickness ratio approved in the Generic Cost of Capital (GCOC) decision in March 2015. With its robust cost recovery mechanism and operating efficiency, ALP has sustained profitability moderately above its regulatory return parameter (on average) over the past five years. A significant upcoming regulatory decision is the GCOC for 2016 and 2017, which should be released by late September 2016. DBRS believes that any further weakness in the approved ROE or equity thickness ratio will put negative pressure on the credit quality of ALP. The Alberta Utilities Commission’s (AUC) recent decisions on ALP’s 2015–2016 General Tariff Application (GTA) in May 2016 and its 2012–2013 Direct Assigned Capital Deferral Account (DACDA) reconciliation application in June 2016 were reasonable and had neutral credit impacts. DBRS acknowledges that tariff relief approved in the GTA will result in slower operating cash flow growth; however, they reduce long-term regulatory liabilities, effectively improving earnings visibility. While the AUC lowered some of the key escalation (concerning labour costs and contractor costs) and inflation rates in the GTA, these downward adjustments were reasonable given current economic conditions in Alberta. There were no material disallowed costs in the DACDA that would affect the credit quality of ALP.

With the downshifting of Alberta’s economy and completion of the big build associated with electric transmission infrastructure, capital expenditures are expected to further normalize over the next two years, while earnings and cash flow will benefit from a higher rate base. However, with the AUC’s approved tariff relief measures as part of the GTA decision in May 2016 (which were initiated by ALP), operating cash flow will grow at a slower pace, and thus, DBRS expects the cash flow-to-debt ratio to improve but remain in the BBB rating range (10.0% to 12.5%) over the next two years. The rating assumes that excess cash, which is not required to maintain the regulatory capital structure, will flow up to the parent company, AltaLink Investments, L.P. (rated BBB, Stable by DBRS).

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 methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016), which can be found on our website under Methodologies.