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

DBRS Limited (DBRS Morningstar) confirmed Alectra Inc.'s (Alectra or the Company) Issuer Rating and Senior Unsecured Debentures rating at "A," and the Commercial Paper rating at R-1 (low). All trends are Stable. The ratings of Alectra are based on the Company's regulated electricity distribution business in Ontario (88% of 2022 EBITDA), which provides a predictable source of earnings and cash flows. The Stable trend reflects Alectra's financial risk assessment, which remains supportive of the current ratings.

There were no material changes to Alectra's business risk assessment in 2022, which continues to be supported by a reasonable regulatory framework under the Ontario Energy Board. There were no material changes in regulatory environment as the Company continues to operate under a 10-year deferral period until 2027, with rates increasing annually, largely by inflation. Additionally, the proportion of earnings from nonregulated activities has stabilized with Alectra expecting nonregulated activities to remain around 10% to 15% of EBITDA over the medium term. While capital expenditures (capex) over the next five years will continue to focus on regulated activities (92% of planned capex), DBRS Morningstar notes nonregulated opportunities may arise (such as Independent Electricity System Operator request for proposals for additional generation or storage assets), which could accelerate growth in this segment. DBRS Morningstar will continue to monitor the Company's plans for its nonregulated businesses. Should earnings from the nonregulated business exceed the 20% threshold on a sustained basis, Alectra's business risk assessment could be negatively affected.

Alectra's financial risk assessment remains supportive of the "A" rating. The Company's key credit metrics weakened in 2022 because of lower cash flows and a higher debt load due in part to the regulatory lag in recovery of flowthrough energy costs. DBRS Morningstar expects Alectra to continue to fund its distributions and capex program in a prudent manner in order to maintain leverage in line with the regulatory capital structure (60% debt) and its key credit metrics in line with the current rating category. However, should key credit metrics weaken to a level no longer commensurate with the current ratings, a negative rating action could occur.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616).

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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