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

DBRS Limited (DBRS) confirmed Alectra Inc.’s (Alectra or the Company) Issuer Rating and Senior Unsecured Debentures rating at “A.” All trends are Stable. The ratings of Alectra are underpinned by the Company’s stable regulated electricity distribution business in a strong franchise area. The confirmation reflects Alectra’s financial performance for the fiscal year ended 2017 and over the 12 months ended March 31, 2018 (LTM 2018), which has been solid and in line with DBRS expectations.

Alectra’s key credit metrics for 2017 and LTM 2018 remained supportive of the current ratings. DBRS had noted that the Company’s cash flow-to-debt and debt-to-capital ratios may be under pressure over the near term as a result of financing the Hydro One Brampton Networks Inc. acquisition through 70% debt. For LTM 2018, Alectra’s debt-to-capital and cash flow-to-debt ratios improved because of a lower debt load. Going forward, DBRS expects the Company to manage its capital expenditures and dividends in a prudent manner in order to maintain these ratios within the “A” rating category. 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.

The ratings of Alectra continue to be supported by the Company’s stable regulated electricity distribution business in Ontario. DBRS views regulation for Alectra’s regulated subsidiary, Alectra Utilities Corporation (AUC; approximately 93% of LTM 2018 EBIT), 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. On April 5, 2018, AUC received its first Electricity Distribution Rate decision for rates effective January 1, 2018. The OEB approved rate increases of 0.9% (inflation factor of 1.2% less a productivity factor of 0% and stretch factor of 0.3%) for the Brampton, Enersource and PowerStream rate zones, which operate under the Price Cap Incentive Rate (IR) setting method. The Horizon Utilities rate zone, which remains under Custom IR, saw rates increase as per a settlement proposal that had set the revenue requirement for each year from 2015 to 2019.

In March 2018, Alectra filed a Mergers, Acquisitions, Amalgamations and Divestitures application with the OEB requesting to merge with Guelph Hydro Electric Systems Inc. (Guelph Hydro; the Merger). If approved, the City of Guelph will receive an ownership interest of approximately 4.63% in Alectra and one permanent seat on its Board of Directors. 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 return on equity of around 9%. A decision from the OEB is expected later this year, with the Merger targeted to close on January 1, 2019.

Notes:
The principal methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), 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.

DBRS 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@dbrs.com.

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