DBRS Confirms AltaLink, L.P.

DBRS Limited (DBRS) confirmed the ratings of AltaLink, L.P. (ALP). The confirmations reflect 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. Financial metrics, previously stressed by the Alberta Electric System Operator (AESO) directed capital expenditures (capex) “big build” program, have largely normalized with the end of this program.

DBRS views the quality of the regulatory regime in Alberta as generally supportive of the current ratings. The Alberta Utilities Commission’s (AUC) Generic Cost of Capital decision for 2016 and 2017 increased ALP’s allowed return on equity (ROE) to 8.5% and its equity thickness to 37%, bringing these parameters closer to (but still on the lower end of) comparable North American peers. Terms of the negotiated settlement between ALP and its intervenors for the 2017-2018 General Tariff Application were approved by the AUC in August 2017, and are reasonable and credit neutral, while reducing regulatory lag. These terms commit ALP to modest operating and maintenance cost reductions over two years and a rate refund of $30 million in 2017/2018 related to revised depreciation rates. Following these rate refunds, ALP has publicly committed to holding the tariff flat over the next five years.

Utility Asset Disposition (UAD) and stranded asset cost remain a potential outstanding issue. On October 11, 2017, the Alberta government commenced an engagement process to arrive at a legislative solution to the UAD issues brought on after the Alberta Court of Appeal dismissed an appeal by the Alberta utilities of the AUC’s 2013 UAD decision. This decision affirmed the AUC’s discretion to allocate gains or losses associated with assets which have been extraordinarily retired from the rate base (due to, for instance, a natural disaster, an accident, or the AUC’s determination that the asset is no longer required for service due to low utilization or other considerations). Draft wording of Bill 13 was released on April 19, 2018 and relevant sections appeared to provide legislative confirmation of the AUC’s discretion in this regard. Following further consultations with the utilities, the Alberta government acknowledged stakeholder concerns and on May 30, 2018, removed sections related to the allocation of costs and benefits of stranded assets from the Bill with the intent of developing a revised policy at a later date. DBRS will continue to monitor developments in this area and maintains a “Below Average” view of the Stranded Cost Recovery regulatory factor.

In its 2017 Long Term Outlook published July 2017, the AESO reduced the load forecasts which drive the 2017 Long Term Plan ( January 2018). Lower load growth may result in some near-term excess transmission capacity particularly given the recently completed build out. ALP’s growth capex is projected to normalize at $100 million to $200 million annually and earnings and cash flow will benefit from the higher rate base. Cash flow has also benefited from improved regulatory parameters in 2016 and 2017, and a decision for 2018-2020 parameters is expected in August 2018. Given ALP’s public commitment to hold its tariff constant over the next five years, as well as ratepayer relief measures previously approved by the AUC, operating cash flow will grow at a slower pace and DBRS expects the cash flow-to-debt ratio to be toward the lower end of the “A” range over the near term. The rating incorporates financial projections from ALP, which assume the current ROE and deemed equity thickness do not change materially and that extra cash, which is not required to maintain the regulatory capital structure, will flow up to the parent company, AltaLink Investments, L.P. (rated BBB with Stable trends by DBRS).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry Methodology and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies

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 under Related Documents or by contacting us at info@dbrs.com.

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

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