Morningstar DBRS Confirms AltaLink, L.P.'s Issuer Rating at "A," Stable Trend

DBRS Limited (Morningstar DBRS) confirmed both the Issuer Rating of AltaLink, L.P. (ALP or the Company) and the rating on its Senior Secured Notes at "A," as well as the rating on its Commercial Paper at R-1 (low). Morningstar DBRS also confirmed the Issuer Rating and the ratings on the Senior Unsecured Bonds of AltaLink Investments, L.P. (AILP) at A (low). All trends are Stable. AILP's ratings are based on ALP's Issuer Rating and minimal leverage at the holding company level, with a one notch differential reflecting structural subordination.

KEY CREDIT RATING CONSIDERATIONS
ALP's credit ratings are largely based on the Company's large and stable transmission operation generating stable and predictable cash flows. Morningstar DBRS views the Alberta Utilities Commission's (AUC) regulatory framework as generally supportive. ALP's financial risk assessment remains supportive of the "A" ratings, and the Company has consistently maintained its operating efficiency to recover most of its revenue requirements and achieve its allowed return on equity (ROE).

In November 2023, the AUC approved a 9.28% ROE for 2024 for Alberta utilities under a new formula, which Morningstar DBRS views as modestly positive for reducing regulatory lag. In June 2024, the AUC made the following decisions in its 2024-25 General Tariff Application (GTA): (1) approved ALP's Negotiated Settlement Agreement as filed; (2) approved ALP's salvage allocation methodology, which is expected to reduce the revenue requirements for 2024 and 2025 but result in a modest increase in returns over time; and (3) denied ALP's request to increase wildfire mitigation plan expenditures or establish a wildfire damages deferral account. Morningstar DBRS does not believe the GTA decision will materially affect ALP's credit quality. Although the occurrence of wildfires has increased in recent years in Alberta, Morningstar DBRS continues to view ALP's wildfire risk exposure as an event risk and believes it is substantially mitigated by the Company's existing wildfire mitigation strategies, including system hardening, risk modelling, daily hazard forecasts, a proactive de-energization program, and operational practices.

CREDIT RATING DRIVERS
A positive rating action is unlikely in the medium term given the stability of the current business risk profile, but could occur if cash flow-to-debt improved to 15% on a sustained basis. A negative rating action is also unlikely given the Company's very low-risk transmission operation that generates predictable and stable cash flows, but could occur if there were an adverse regulatory decision or if key credit metrics deteriorated to a level no longer commensurate with the current ratings (i.e., cash flow-to-debt below 10%, debt-to-capital above 65%, and EBIT-to-interest below 1.80 times).

EARNINGS OUTLOOK
ALP has benefited from predictable and stable earnings, which are almost entirely received from the Alberta Electric System Operator with no volume or commodity risks. Morningstar DBRS expects the Company's earnings to improve modestly in 2024, driven by a higher allowed ROE of 9.28% for the year, and to remain stable over the medium term, reflecting modest rate-base growth.

FINANCIAL OUTLOOK
ALP's key credit metrics are supportive of the current ratings. Morningstar DBRS expects the Company's credit metrics to remain stable, with cash flow-to-debt in the 12% to 13% range over the medium term. Morningstar DBRS expects annual capital expenditure to be about $340 million in 2024 and 2025, and to be prudently financed with internally generated cash flows.

CREDIT RATING RATIONALE
The ratings on ALP are supported by its generally supportive regulatory framework, predictable and steady cash flow, and supportive financial profile. These are partly offset by regulatory risks in Alberta, such as stranded asset risk and uncertainties associated with the Government of Alberta's (rated AA with a Stable trend by Morningstar DBRS) electricity policy.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors 
In the analysis of ALP, the BRA factors were considered in the order of importance contemplated in the methodology.
 
(B) Weighting of FRA Factors 
In the analysis of ALP, the FRA factors were considered in the order of importance contemplated in the methodology.
 
(C) Weighting of the BRA and the FRA 
In the analysis of ALP, the BRA carries greater weight than the FRA. 

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (June 27, 2024) https://dbrs.morningstar.com/research/435127.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS has access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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