DBRS Confirms Alectra Inc. at “A,” Stable Trends

DBRS Limited (DBRS) confirmed Alectra Inc.’s (Alectra or the Company) Issuer Rating and Senior Unsecured Debentures rating at “A.” All trends remain Stable. The confirmation reflects Alectra’s financial performance over the eight months ended September 30, 2017 (8M 2017; unaudited), which has been solid and in line with DBRS expectations. The ratings of Alectra are underpinned by the Company’s stable regulated electricity distribution business in a strong franchise area.

Alectra was formed following the merger of Enersource Holdings Inc. (Enersource), PowerStream Holdings Inc. (PowerStream) and Horizon Holdings Inc. (Horizon) in January 2017 in order to acquire Hydro One Brampton Networks Inc. (HOBNI). DBRS views regulation for Alectra’s flagship subsidiary, Alectra Utilities Corporation (AUC; approximately 93% of 8M 2017 cash flows), under the Ontario Energy Board (OEB) as reasonable for the current ratings. AUC should benefit from being able to defer rebasing for up to ten years following the merger in order to retain any operating synergies. However, DBRS notes that this is partly offset by integration risk as well as early rebasing risk which could result in synergetic benefits being less than projected. In July 2017, AUC filed its first Electricity Distribution Rate application for rates effective January 1, 2018. For the time being, AUC will continue to operate four separate rate zones, with the Brampton, Enersource and PowerStream rate zones operating under the Price Cap Incentive Rate (IR) setting method while the Horizon Utilities rate zone will remain under Custom IR before transitioning to Price Cap IR in 2020. DBRS notes that under Price Cap IR, AUC will have to achieve productivity at least equal to the regulatory productivity and stretch factors in order to achieve the allowed return on equity (ROE). However, DBRS views earnings pressure to be manageable given that the rate adjustment parameters for the productivity and stretch factors for 2018 remain reasonable at 0% and 0.3%, respectively.

DBRS notes that on December 14, 2017, the City of Guelph voted in favour of a merger between Guelph Hydro Electric Systems Inc. (Guelph Hydro) and Alectra (the Merger). Following the Merger, the City of Guelph will receive an ownership interest of approximately 4.63% in Alectra and one permanent seat on its Board of Directors. A merger application is expected to be submitted to the OEB in early 2018 for the Merger to close by the end of the year. DBRS does not expect the Merger to have a material impact on the Company’s credit profile as (1) Guelph Hydro operates under Price Cap IR, (2) Alectra will not have to issue incremental debt for the Merger and (3) Guelph Hydro has adhered to the regulatory capital structure of 60% debt and its earnings have been in line with the allowed ROE of around 9%.

Given the current regulatory environment in Ontario, DBRS views a rating upgrade for Alectra as unlikely. Additionally, DBRS expects Alectra’s cash flow-to-debt and debt-to-capital ratios to remain under pressure over the near term as a result of financing the HOBNI acquisition through 70% debt, limiting financial flexibility for the Company. A negative rating action could occur should these two ratios weaken to a level no longer commensurate with the current rating category for a sustained period (cash flow-to-debt below 12.5% and debt-to-capital above 65%), potentially due to weaker-than-expected or a lack of synergies.

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, which can be found on dbrs.com under Methodologies.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.