DBRS Morningstar Changes Trend on AltaLink Investments, L.P. to Stable from Positive, Confirms Ratings at BBB (high)

DBRS Limited (DBRS Morningstar) changed the trends on the Issuer Rating and the Senior Unsecured Bonds rating of AltaLink Investments, L.P. (AILP) to Stable from Positive. DBRS Morningstar also confirmed both ratings at BBB (high). The trend changes are a result of DBRS Morningstar's expectation of plans to prudently relever and, over time, target a higher nonconsolidated leverage ratio. Over the past few years, AILP has used the strength of increasing dividend cash flow from AltaLink, L.P. (ALP or OpCo, rated “A”/R-1 (low) by DBRS Morningstar) to significantly decrease its nonconsolidated leverage, which currently stands at approximately 11% as of March 31, 2020, a reduction from 18.5% as at Q1 2019 and 24.2% as at same period in 2018. This consistently decreasing leverage and the original expectation of a continued trend in this direction, along with ALP's self-sufficient cash generation ability following an extended capital investment program requiring some parental support, formed the basis of DBRS Morningstar's positive rating actions in July 2019.

ALP's strengthened cash dividends to AILP flow from the Alberta Electricity System Operator-directed investments from 2011 to 2015, which have resulted in a greatly expanded rate base, and a favourable increase in allowed return on equity (ROE) from the Alberta Utilities Commission (AUC) beginning in 2017. ALP significantly increased the flow of its excess cash to AILP starting in 2018. Over the course of 2019, AILP used almost all of these distributions to pay down approximately $62 million of short-term revolving debt and $200 million of maturing long-term debt. Another $200 million of additional long-term notes was retired in Q1 2020 largely via a similar-sized increase on AILP's operating line of credit.

ALP has now been consistently self-sufficient from 2017 through Q1 2020, with operating expenses and capital expenditure met from internally generated cash flows, and without any requirement for intrayear cash injections. DBRS Morningstar does not believe that ALP will be significantly affected by the Coronavirus Disease (COVID-19) pandemic and believes dividends will continue to be steady. Based on expectations of this steady cash flow, AILP intends to relever to a higher nonconsolidated leverage in support of investment opportunities by its affiliate, BHE Canada, L.P.; however, in the short term, AILP may continue to pay down revolving debt. The trend change to Stable from Positive reflects AILP's intent while the confirmation of the rating at BBB (high) reflects DBRS Morningstar's belief that while the current financial metrics are above the rating level, these will become consistent with the rating as AILP releverages. DBRS Morningstar may take a positive rating action if the releveraging fails to materialize, leading to sustained metrics above the rating range; conversely, a negative rating action may be taken if the leverage level ends up exceeding DBRS Morningstar's expectations.

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) 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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