AltaLink fighting regulator’s ruling

Transmission company faces possible debt downgrade over bonds

AltaLink is facing a possible debt downgrade amid Alberta regulatory decisions that have made utility bonds the worst corporate performers in Canada.

The Calgary-based transmission company purchased by Warren Buffett’s Berkshire Hathaway Inc. energy unit for $3.2 billion last year, is fighting rulings by the Alberta Utilities Commission that investors, analysts and the company say reduce returns and increase the risk for losses.

“These bonds have materially underperformed comparable provincial bonds,” said David Frei, senior portfolio manager at Fiera Capital Corp. in Toronto. “In light of what we identify as heightened regulatory risk and the credit-negative impact that it has on Alberta utility bonds, we prudently reduced our holdings to a significant underweight position in the past year.”

The regulator on March 23 reduced the allowed return on equity for utilities to 8.3 per cent from 8.75 per cent. That followed a November 2013 ruling that shareholders are accountable for gains or losses on assets removed from service from an unanticipated event.

The Alberta Court of Appeal is hearing the utilities’ case against the 2013 decision by the Alberta Utilities Commission next week in Calgary. AltaLink joined AltaGas Ltd., Enmax Corp., Epcor Utilities Inc. and units of Atco Ltd. and Fortis Inc. in the appeal. The commission said Alberta utilities remain healthy businesses.

“If some of the regulatory risks that the financial community is talking about in Alberta manifest themselves, that’s going to cause a downgrade of not only AltaLink but also many utilities in Alberta,” AltaLink chief executive Scott Thon said in a phone interview. “That just means an increase in our debt costs, and we’re raising a lot of debt in Alberta.”

Buffett didn’t return a request for comment left with an assistant.

With a loss of 5.1 per cent since March 25, Calgary-based AltaLink’s bonds are the fifth-worst performer among Canada’s largest corporate bond issuers, Bank of America Merrill Lynch data show. ATCO’s Canadian Utilities Inc., which owns electricity and gas and pipelines businesses, is the worst performer with a 5.9 per cent loss. Fortis, an electricity distributor, is the third worst performing with a 5.8 per cent loss.

Investors demand an average premium of 142 basis points to hold bonds of Canadian utilities over benchmark government bonds, 16 basis points more than the average among company debt, according to Bank of America Merrill Lynch data.

The Alberta Utilities Commission is standing by its positions. The 2013 decision was an interpretation of a Supreme Court ruling that utilities disposing of assets outside the normal course of business must deliver all the profits of a sale to shareholders, without sharing with ratepayers.