DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of FortisAlberta Inc. (FAB or the Company) and the rating of its Senior Unsecured Debt at A (low). The trends are Stable. The confirmations reflect the Company’s resilient financial and operational performance despite the drop in demand for electricity in Alberta, particularly for industrial customers and oil and gas customers because of (1) low oil prices in 2020 and (2) the Coronavirus Disease (COVID-19) pandemic during 2020 and part of 2021. FAB continued to expand its regulated rate base as a result of customer growth in 2020 and year-to-date 2021, albeit modestly slower than in the previous year. FAB is in the fourth year of the second Performance-Based Regulation (PBR) term (2018–22). The second PBR term has allowed FAB to generate solid and stable credit metrics, which are expected to remain stable through the end of the term.
From a cost of capital perspective, the allowed return on equity (ROE) and the equity ratio in the regulatory capital structure for 2021 and 2022 remain unchanged from 2020 and 2019 at 8.5% and 37.0%, respectively. The Alberta Utilities Commission (AUC) announced that it plans to initiate a future generic cost of capital (GCOC) proceeding to determine the allowed ROE and equity ratio for the post-2022 period. DBRS Morningstar believes that any material changes to the current allowed ROE and equity ratio would affect FAB's funding plan and earnings. DBRS Morningstar notes a few other developments on the regulatory fronts. In September 2021, FAB filed its 2022 annual rate application, requesting an increase of 6.6% to the distribution component of customer rates. A decision on this application is expected at the end of 2021. DBRS Morningstar expects that the AUC's decision on this application will not materially affect FAB's cash flow in 2022.
DBRS Morningstar notes that FAB will be under cost-of-service (COS) in 2023 (or the rebasing year). The Company filed a COS application in November 2021. A rebasing intends to re-align a utility’s reasonable costs to provide service with the revenues it is permitted to collect in customer rates over the subsequent forecast period. The AUC has not provided a specific methodology for developing the forecast but it prescribed a minimum level of detail each utility must include in its application.
FAB's credit metrics in the 12 months ended September 30, 2021, were solid and relatively stable. FAB achieved its solid credit metrics through operational reliability and efficiencies, as well as effective capital project executions. FAB has no exposure to commodity price volatility and has manageable volume risk. Based on FAB's current cash flow projection and its financing plan, DBRS Morningstar expects the Company’s credit metrics to remain relatively stable in the medium term and through the rebasing year 2023, and to continue to support the current ratings.
DBRS Morningstar could take a positive rating action if there is a favourable regulatory decision on the COS year and the future GCOC proceeding while FAB's credit metrics remain solidly stable in the "A" rating category. Although unlikely, DBRS Morningstar could take a negative rating action should the regulatory framework in Alberta, FAB's business risk profile, or FAB’s credit metrics deteriorate significantly on a sustained period.
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.
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), 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).
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