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

DBRS Limited (DBRS) confirmed the Issuer Rating and the 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 credit metrics in the first nine months of 2018. The ratings continue to be supported by FAB’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 view that the second performance-based regulation (PBR) term from 2018 through 2022 largely remains consistent with the first PBR term (2013 to 2017) and will not have a material impact on the Company’s earnings and cash flow.

FAB’s business risk profile has remained relatively stable since DBRS’s last rating review. The Company is in the first year of the second PBR term, which is similar to the first PBR term in that an increase in annual electricity distribution rates is based on the distribution rates in the preceding year adjusted for estimated inflation (I) and an estimated productivity factor (X) or preceding year’s distribution rates plus (I-X). Despite low going-in rates in the basing year (2018), DBRS does not expect FAB’s financial performance under the second PBR term to have a material impact on the Company’s credit metrics because of its consistent operational reliability and its ability to manage controllable operating costs. Under the second PBR term, capital costs that are not fully recovered through the I-X formula may be recovered either through the K-bar incremental capital funding mechanism or potentially the Type I mechanism (intended to address novel, third-party costs) if the costs meet certain criteria. The allowed return on equity (ROE) and equity component of the regulatory capital structure for 2018, 2019 and 2020 will remain the same as in 2017 at 8.5% and 37%, respectively. DBRS notes that the ROE and the equity component of the capital structure are among the lowest compared with other Canadian and U.S. jurisdictions.

FAB’s financial performance for the last 12 months ended September 30, 2018, was solid with all key ratios supportive of the current ratings. With a growing customer base, DBRS expects the Company’s rate base to increase modestly over the medium term, supporting growth in EBITDA and cash flow. DBRS expects capex over the next few years to be in line with 2017, financed such that the consolidated capital structure (excluding goodwill) remains consistent with the regulatory 37% equity/63% debt-capital structure. DBRS believes that a negative rating action could occur if FAB’s business risk profile significantly weakens as a result of potentially negative regulatory changes in Alberta or a material deterioration of its credit metrics on a sustained basis.

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

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 related internal documents of the rated entity or its related entities in connection with this rating action.

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.