DBRS Morningstar Confirms AltaLink, L.P. at “A” With a Stable Trend

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 2020 and the first quarter of 2021 that are in line with the rating level.

DBRS Morningstar continues to view the Alberta regulatory regime as generally supportive of the current ratings. ALP's sole ratepayer is the Alberta Electric System Operator (AESO), the nonprofit corporation mandated to manage the province's electric network, and the Company has been to date largely insulated from end-market or economic risk brought on by the Coronavirus Disease (COVID-19) pandemic. The likelihood of an AESO default 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, both to support potential regulatory decisions and to provide a liquidity buffer.

ALP's focus over the past year has been on execution of its commitment to maintain tariffs at or below 2018 levels for five years to 2023 through a combination of cost control and regulatory actions. DBRS Morningstar notes that decisions by the Alberta Utilities Commission (AUC) have generally been supportive of this objective, including the AUC's April 2020 approval, in its entirety, of the negotiated settlement portion of ALP's 2019-2021 General Tariff Application (GTA); its eventual approval, in November 2020, of ALP's proposed salvage methodology; and its March 2021, approval of regulatory adjustments leading to $230 million in tariff refund for 2021, and, together with past regulatory decisions, representing more than a billion dollars in reduced tariff payments. DBRS Morningstar views these actions as indicative of the commission's continued support for reducing regulatory lag, particularly during pandemic uncertainty. DBRS Morningstar also views positively the AUC's willingness to extend 2021 Generic Cost of Capital (GCOC) parameters into 2022 in recognition of the ongoing economic uncertainty. However, lag remains in issues considered to have industry-wide implications, such as the AUC's decision in the Fortis case regarding the ability of ALP, and DFOs/TFOs in general, to earn an equity return on those parts of its asset base funded by customer contributions, a decision that is now headed to the Court of Appeal of Alberta. Additional unresolved issues include the AUC's consideration for re-adopting a formulaic GCOC approach for all utilities in Alberta. Utility Asset Disposition (UAD) and stranded asset costs remain outstanding issues, and accordingly, DBRS Morningstar continues to maintain a Below Average assessment of the stranded cost recovery regulatory factor.

Aside from a marginal increase in rate base from the AUC approved tariff refund, ALP will likely see only minimal rate-base growth going forward, particularly as the AESO's July 2021 biannual update to long-term electricity growth forecasts are marginally lower than its 2019 forecast, owing to the long-term effects of both the pandemic and the gradual decline of oil-related activity in Alberta. Given ALP’s commitment to freeze tariff rates and 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 ALP's financial projections and assume that extra cash not required to maintain the regulatory capital structure will flow to AltaLink Investments, L.P. (rated BBB (high) with a Stable trend by DBRS Morningstar) after a temporary reduction in dividend cash flow to fund the equity portion of the 2021 tariff refund. 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (October 27, 2020; https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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