Morningstar DBRS Confirms Credit Ratings of Alberta PowerLine Limited Partnership at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the credit ratings on the Long-Term Senior Bonds and the Medium-Term Senior Bonds (collectively, the Senior Bonds) of Alberta PowerLine Limited Partnership (APL or ProjectCo) at A (low) with Stable trends. ProjectCo is the special-purpose vehicle (SPV) created to design, build, finance, operate, and maintain the Fort McMurray West 500-kilovolt (kV) Transmission Project (the Project) under a 36.8-year Project Agreement (PA) with the Alberta Electric System Operator (AESO or the Authority).

KEY CREDIT RATING CONSIDERATIONS
Backed by a parent company guarantee from Canadian Utilities Limited (rated "A" with a Stable trend by Morningstar DBRS), ATCO Electric Ltd. continues as the Operations, Maintenance, and Lifecycle Contractor (O&M Contractor) for APL. Since APL achieved energization on March 29, 2019, operations have generally progressed smoothly.

The vertical bus element failure reported in April 2023 was remediated but resulted in 269 minutes of forced outage and $7,658 in payment deductions, which has been fully passed down to the O&M Contractor. APL conducted a joint inspection with the O&M Contractor and the Design-Built Joint Venture (DBJV) in May 2023 to identify the root cause of the failure and subsequently developed a remediation plan to prevent the same parts on other sites from similar failures. Since then, no further failure was reported and there has been no evidence suggesting potential design flaws.

No forced outage or payment deductions were reported during the 12 months ended on August 31, 2024. Between June 4, 2024, and June 6, 2024, ProjectCo executed a planned outage on certain facilities to perform scheduled maintenance works, which required the West Fort McMurray 500 kV Transmission Line and subsequent substation facilities to be temporarily de-energized. During such planned outage, the following major tasks were completed: (1) transformer 1201T maintenance and relevant venting procedure, (2) maintenance testing of all transformers and reactors, (3) sudden pressure relay testing (for PRC-005 compliance), (4) IT system update, (5) auxiliary trip relay testing, (6) repairs on certain transformer radiator valves and switches, and (7) rotations of the spare transformer into service. Other maintenance activities performed over the past year included the usual transmission line patrols, access road improvements, and vegetation management.

Per a change order issued by AESO, ProjectCo installed protection and control circuit and equipment (the Remedial Action Scheme Installation) to accommodate a system reconfiguration because the Authority added a new generator. Works were complete in 2021 without incurring any payment deductions, and all installation costs have been fully recovered. Further, through an amendment to the PA in 2023, AESO has agreed to reimburse ProjectCo for any incremental O&M works as a result of such change order (approximately $500 per month, indexed).

The designated change in law event identified in 2019 for two Alberta Reliability Standards requirements (PRC-002 and PRC-005) has also been resolved: AESO has covered costs of the works completed and will fully fund ongoing works pertaining to modification of certain protection settings, additional testing, data collection, and reporting through the life of the Project (around $150 per month, indexed).

ProjectCo and the O&M Contractor completed a facility protection review in Q1 2021 in which they reviewed the protection schemes of all assets to ensure proper settings valid for the system's present configuration, with some minor defects discovered and addressed by the DBJV under warranties. The next facility technical review will be performed in 2026. Certain facility site ground resistance testing will be carried out annually to meet industry best practices.

The COVID-19 pandemic and the wildfires in Alberta have not had any material or negative impact on APL's ability to carry out its O&M activities. The relationship with AESO remains positive.

CREDIT RATING DRIVERS
Morningstar DBRS believes a credit rating upgrade unlikely in the near term given the limited upside revenue potential for an availability-based public-private partnership (PPP) transaction. Morningstar DBRS may take a negative credit rating action should the Project experience material deterioration in operating performance and a worsening trend of unplanned outages leading to significant deductions and a deterioration in credit metrics.

FINANCIAL OUTLOOK
For both the 12-month operating period ended December 2023, and the 12-month period ended September 2024, the debt service coverage ratio (DSCR) was 1.25 times (x). Morningstar DBRS expects the minimum DSCR to remain at 1.25x, which is standard for availability-based PPP projects rated in the "A" range. Given the limited scope of maintenance work, the 61.9% O&M cost resilience and the 108.2% lifecycle cost resilience are strongly positioned for the credit ratings.

CREDIT RATING RATIONALE
ProjectCo's credit rating strengths are underpinned by (1) low complexity and reasonably straightforward operating requirements and (2) its experienced O&M Contractor backed by a solid investment-grade parent company guarantor. The challenge relates to (1) Alberta Utilities Commission's approval for compensation provided by the AESO and (2) O&M Contractor retendering risk.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Drivers
In the analysis of ProjectCo, the relative weighting of the Rating Drivers listed in the Part One - Rating Availability-Based PPPs section of the methodology was approximately equal.

(B) Weighting of FRA Factors
In the analysis of ProjectCo, the following FRA factor listed in the Part One - Rating Availability-Based PPPs section of the methodology was considered more important: operating and maintenance and lifecycle breakeven ratios.

(C) Weighting of the Rating Drivers and the FRA
In the analysis of ProjectCo, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (August 13, 2024), https://dbrs.morningstar.com/research/437820

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 criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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 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 info-DBRS@morningstar.com.

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 had 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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