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

DBRS Limited (DBRS Morningstar) confirmed Altalink, L.P.’s (ALP or the Company) Issuer Rating and the rating of its Medium-Term Notes (Secured) at “A” and the rating of its Commercial Paper at R-1 (low). All trends are Stable. The ratings reflect ALP’s low-risk regulated Transmission business in Alberta accounting for 100% of ALP’s earnings and assets, a reasonable regulatory environment, and financial metrics achieved over 2019 and the first quarter of 2020 which are in line with the rating level.

DBRS Morningstar continues to view the Alberta regulatory regime and electricity market structure as generally supportive of the current ratings. As ALP's sole rate-payer is the Alberta Electric System Operator (AESO), the nonprofit statutory corporation mandated by legislation to manage the province's electric network system, DBRS Morningstar believes that the Company is largely insulated from end-market or economic risk brought on by the Coronavirus Disease (COVID-19) pandemic. The likelihood of the AESO defaulting on its tariff payment to ALP is low, and DBRS Morningstar notes that ALP was able to add a new $100 million credit facility in April 2020, during the height of the pandemic's uncertainty in Canada, both to support potential regulatory decisions and to provide a layer of liquidity buffer.

The Alberta Utility Commission (AUC)'s April 2020 approval, in its entirety, of the negotiated settlement portion of ALP's 2019-2021 General Tariff Application is the second such approval of a negotiated agreement and indicative in DBRS Morningstar's view of the commission's continued support of reducing regulatory lag. However, regulatory lag remains in cases such as final approval for capital-spend inclusion into the rate base, as well as where the commission considers issues to have industry-wide implications, such as ALP's proposed changes to its salvage recovery methodology. Additional unresolved regulatory issues include the Generic Cost of Capital (GCOC) from 2021 onwards, both in terms of actual return on equity and equity thickness parameters to be approved (albeit with a temporary measure to set interim parameters for 2021) as well as the consideration by the AUC for re-adoption of a formulaic GCOC approach for all utilities in Alberta. Utility Asset Disposal and stranded asset cost remain as outstanding issues, and accordingly DBRS Morningstar continues to maintain a Below Average assessment of the stranded cost recovery regulatory factor.

The AESO's October 2019 biannual update to its long-term electricity growth forecasts are largely unchanged from its previous 2017 forecast, while an April 2020 analysis of the coronavirus pandemic's impact on electricity demand concluded a sharp decrease over 2020 and 2021, and a relatively uncertain path back to original projections thereafter. ALP will likely see only minimal medium-term rate-base growth as a result. Given ALP’s commitment to freeze tariff rates and the ratepayer relief measures previously approved by the AUC, DBRS Morningstar expects the near-term cash flow-to-debt ratio to be toward the higher end of the “BBB” range while most other rating factors continue to be assessed at the A range. The ratings incorporate financial projections from ALP and assume that the extra cash not required to maintain the regulatory capital structure will flow up to the parent company, AltaLink Investments, L.P. (rated BBB (high) with a Stable trend by DBRS Morningstar). A ratings upgrade is unlikely given the near-term limited growth in cash flow while a ratings downgrade could be driven by an unfavourable change in regulatory parameters.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 Industries (September 16, 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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