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. (FAB or the Company) at A (low). The trends remain Stable. The confirmations reflect the Company’s strong credit metrics and its low-risk business profile as a regulated electric distributor. The confirmations incorporate the impact of the Alberta Utilities Commission’s (AUC) decision to raise allowed ROE in 2017 to 8.50% from 8.30% and lower deemed equity ratio for 2016 and 2017 to 37% from 40%.

FAB’s financial performance for the 12 months ended September 30, 2016 (LTM 2016), was solid, with all key credit metrics maintained in the “A” range. In particular, the equity-to-capital ratio has been maintained near 40% – a level that was in line with the regulatory capital structure during 2013–2015 period. At this level, the capital structure is solidly supportive of the current rating and is stronger than the regulatory deemed equity ratio of 37% in 2016 and 2017. In addition, the Company achieved better efficiency factor allowed by the regulator in the formula, resulting in a modestly higher return of equity (ROE) than the allowed ROE.

FAB’s business risk profile has remained relatively stable since DBRS’s last rating review. The Company has almost completed the fourth year of the five-year Performance Base Regulation (PBR) plan. In October 2016, the Alberta Utilities Commission (AUC or the Commission) issued a decision related to 2016 and 2017 generic cost of capital proceedings (GCOC). The decision maintains FAB’s allowed ROE at 8.30% in 2016, which is one of the lowest compared with other Canadian jurisdictions, and will increase to 8.50% in 2017. However, the Company’s deemed equity for 2016 is reduced to 37% from the 40% level that was allowed during the 2013–2015 period and will remain at 37% for 2017. DBRS does not expect the decision to have a material impact on FAB’s earnings and cash flow for those two years since it only applies to capital trackers that are outside of the formula during the PBR period.

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, with the new 37% deemed equity in the regulatory capital structure for 2016 and 2017, DBRS expects the Company to raise its debt-to-capital ratio from the current level to reflect the new regulatory capital structure. As a result, EBIT interest coverage and cash flow ratios will likely be negatively impacted to a degree. However, the credit ratios at the higher debt level should still be consistent with current rating.

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 methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on our website under Methodologies.