DBRS Morningstar Confirms Alectra Inc. at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Alectra Inc. (Alectra or the Company) at "A" and its Commercial Paper (CP) rating at R-1 (low). All trends are Stable. The confirmations are based on the stable nature of Alectra's regulated electricity distribution operations in Ontario. The Stable trends reflect the Company's key credit metrics that, despite some weakness in 2020, remain in line with the current rating category.

Alectra's business risk assessment continues to be underpinned by its reasonable regulation under the Ontario Energy Board. DBRS Morningstar notes that there were no material changes in the regulatory environment in 2020. Alectra continues to operate under the Price Cap Incentive Rate-Setting mechanism whereby rates increase annually by inflation less productivity and stretch factors (1.9% for 2021). DBRS Morningstar does not foresee any material changes to Alectra's business risk assessment in the medium term as the Company is allowed to defer rebasing until 2027, with productivity gains from the merger and acquisition of the predecessor utilities largely accruing to the shareholders.

In January 2021, Alectra acquired Holland Power Services Inc., a power restoration services company, for share consideration of approximately $52 million plus an additional $28 million for working capital. DBRS Morningstar does not consider this acquisition to have a material impact on the Company's risk profile as regulated activities will continue to contribute more than 90% of earnings and cash flows. Alectra's debt-to-capital and cash flow-to-debt ratios weakened in 2020, however, as the funding for the acquisition, largely through commercial paper, was issued in December 2020. Cash flows for the year were also weaker as the Company expensed expected credit losses of $19 million and higher cleaning costs of $4 million related to the ongoing Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar expects Alectra's debt-to-capital and cash flow-to-debt ratios to recover to historical levels in 2021. However, should key credit metrics weaken further to a level no longer commensurate with the current ratings, a negative rating action could occur.

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.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 27, 2020, https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021, https://www.dbrsmorningstar.com/research/375001), 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).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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