DBRS Morningstar Upgrades AltaLink Investments, L.P. to A (low) With Stable Trends

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and the Senior Unsecured Bonds rating of AltaLink Investments, L.P. (AILP) to A (low) from BBB (high). Both trends are Stable. The rating upgrades are due to financial metrics, notably the nonconsolidated debt leverage, which has exceeded the rating range over the past two to three years. The financial metrics are also supported by the strong credit quality of AILP's wholly owned subsidiary, AltaLink, L.P. (ALP; rated "A"/R-1 (low) with Stable trends by DBRS Morningstar). During the past two to three years, AILP has used the strength of increasing dividend cash flow from ALP to decrease its nonconsolidated leverage, and as of Q1 2022, has completely paid down the remainder of its long-term debt, leaving only short-term revolving credit facilities used for operating purposes. In the absence of identified investment opportunities or other outlets for its free cash flow, DBRS Morningstar expects AILP to pay down the remaining short-term debt. DBRS Morningstar notes that, as of the date of this press release, AILP has not embarked on any such investment program but it continues to evaluate such opportunities.

ALP’s strengthened cash dividends to AILP flow from the Alberta Electric System Operator (AESO)-directed investments from 2011 to 2015, which resulted in a greatly expanded rate base and a favourable increase in allowed return on equity from the Alberta Utilities Commission (AUC) beginning in 2017, which has been extended on a rolling basis during the Coronavirus Disease (COVID-19) pandemic. ALP significantly increased the flow of its excess cash to AILP starting in 2018. Between 2019 and 2021, AILP used distributions to pay down $600 million of maturing long-term debt (including via draws on its operating lines) and fund dividend distributions to its parent. Distribution flow from ALP in 2021 was constrained by the use of cash to fund an AUC-approved $230 million tariff refund to ratepayers, which DBRS Morningstar views as a one-time event.

ALP is not expected to require support from AILP in the foreseeable future given the low scale of capital expenditure (capex) and the projected low growth in electricity demand in Alberta over the next 20 years as forecast by the AESO in its 2021 Long-term Outlook. DBRS Morningstar notes that ALP’s capex projects over the next five years have been largely identified and budgeted.

The rating upgrade reflects AILP’s continued decreasing nonconsolidated debt levels and correspondingly stronger financial metrics, which are projected to continue improving. DBRS Morningstar notes that AILP and its sister company BHE Canada have left open the possibility for a targeted releveraging at AILP to support investment programs, such as acquisitions or expansions by BHE Canada. DBRS Morningstar will evaluate the impact of any such investment programs as and when they occur, and may take a negative rating action if this releveraging begins to materialize and leads to debt levels and financial leverage commensurate with a lower rating level. Conditions leading to another positive rating action is not considered likely.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922/rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

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.

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

DBRS Morningstar 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 [email protected].

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

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