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) (which includes the Series 2020-1 Senior Secured Notes) 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 2021 and the first quarter of 2022 that are in line with the rating level.

ALP continues to execute on its five-year commitment to return money to ratepayers through a combination of tariff refunds and maintaining tariffs flat at 2018 levels to the end of 2023 via cost control and regulatory actions. The Alberta Utilities Commission’s (AUC) decisions have generally been supportive of this objective. The ALP paid out the approved $230 million tariff refund in 2021 from its free cash flow, leading to marginally lower financial metrics for the year and a reduced dividend distribution to AltaLink Investments, L.P. (rated A (low) with a Stable trend by DBRS Morningstar), ALP’s immediate parent entity. However, in 2022 the AUC declined to approve further refunds of $120 million on grounds of intergenerational equity, noting that the extraordinary conditions of the Coronavirus Disease (COVID-19) pandemic, which were the basis of the approval of $230 million refund, had largely passed. Various other items in the tariff filing were subject to additional scrutiny prior to being approved through the review and variance process. Moreover, following several years where an agreement was successfully reached between intervenors and ALP in the negotiated General Tariff Application (GTA) settlement process, negotiations for the 2022–23 GTA did not result in consensus, with the AUC then having to reach a ruling on the submission. As part of this ruling, a significant portion of planned IT capital outlay to bring the Company’s enterprise software systems in line with other Berkshire Hathaway utility properties was denied pending further submissions.

Although the regulator does exercise its discretion with respect to ALP’s plans, DBRS Morningstar views this as normal in the course of regulatory proceedings and views the regulatory regime as commensurate with the current rating level, with the regulator’s ongoing willingness to approve negotiated settlements (notwithstanding the failure to arrive at an agreement this year) as indicative of efforts to reduce regulatory lag. Structural lag and uncertainty remain, however, in issues considered to have industrywide implications, including the AUC’s continued interest in readopting a formula-based approach to Generic Cost of Capital determination, and the decision in the Fortis Utilities case regarding the ability of ALP, and Distribution Facility Operators/Transmission Facility Operators in general, to earn an equity return on those parts of its asset base funded by customer contributions. The Utility Asset Disposition and stranded asset costs issues are also as yet unresolved, and accordingly, DBRS Morningstar continues to maintain a Below Average assessment of the stranded cost recovery regulatory factor.

ALP will likely see only minimal rate-base growth going forward, particularly as the Alberta Electric System Operator's July 2021 biannual update to long-term electricity growth forecasts are marginally lower than its 2019 forecast, resulting in a slowdown of incremental capital expansion projects to the transmission grid. Given ALP’s commitment to freeze tariff rates, DBRS Morningstar continues to see 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. 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.

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) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers).

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@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577