DBRS Confirms FortisAlberta Inc. at A (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of FortisAlberta Inc. (FAB or the Company) at A (low). All trends remain Stable. The confirmations reflect the Company’s solid financial performance and strong credit metrics in the first nine months of 2017. The ratings continue to be supported by the Company’s strong business risk profile as a regulated electricity distributor within a reasonable regulatory framework with no commodity price risk and a good cost-recovery mechanism. The Stable trends incorporate DBRS’s expectation that despite the first Performance-Based Regulation (PBR) ending on December 31, 2017, the second PBR period (2018 to 2022) will not have a material impact on FAB’s earnings and cash flow.

FAB’s financial performance for the last 12 months ended September 30, 2017, was solid, with all key ratios strong and supportive of the current ratings. The impact of higher allowed returns on equity (ROE; increasing to 8.50% in 2017 from 8.30% in 2016) was minimal, as it only applies to the portion of the rate base that is funded by revenue provided by mechanisms separate from the base PBR formula. The debt-to-capital ratio increased in 2016 and 2017 from the 2015 level, reflecting a lower deemed equity component of 37% (40% in 2015). DBRS expects that FAB will at least maintain its current capital structure during the second PBR period. If the debt-to-capital ratio increases to above 65.0% and the cash flow-to-debt declines to below 12.5%, the current ratings could be negatively affected.

FAB’s business risk profile has remained relatively stable since DBRS’s last rating review. The Company is in the last year of the five-year PBR framework that commenced in 2013. In December 2016, the Alberta Utilities Commission (AUC) issued Decision 20414-D01-2016, which outlined the manner in which the distribution rates are to be determined under the second PBR term from 2018 to 2022. DBRS does not expect the second PBR to have a material impact on the Company’s credit profile. However, uncertainties remain with respect to how the going-in revenue requirements in the rebasing year (2018) are to be determined. More clarity will be provided following the AUC’s decision, expected in the first quarter of 2018. In addition, uncertainties also remain with respect to the current generic cost of capital proceeding regarding allowed ROE and deemed equity for 2018, 2019 and 2020. A decision is expected in the third quarter of 2018.

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 principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.