Morningstar DBRS Confirms Credit Ratings on Alectra Inc. at "A" and R-1 (low), Stable Trends
Utilities & Independent PowerDBRS Limited (Morningstar DBRS) confirmed Alectra Inc.'s (Alectra or the Company) Issuer Rating and Senior Unsecured Debentures credit rating at "A" as well as its Commercial Paper credit rating at R-1 (low). All trends are Stable.
KEY CREDIT RATING CONSIDERATIONS
The credit ratings are based on Alectra's (1) regulated electricity distribution business in Ontario (90% of 2024 EBITDA), which provides a predictable source of earnings and cash flows, and (2) reasonable financial risk assessment (FRA). There were no material changes to Alectra's business risk assessment (BRA) since the last review. The Company continues to operate under a 10-year deferral period until 2027 under the Ontario Energy Board (OEB) with annual inflationary rate increases.
CREDIT RATING DRIVERS
Morningstar DBRS notes that a positive credit rating action is unlikely at this time, given the key credit metrics and the current regulatory environment. Morningstar DBRS could downgrade the credit ratings if the Company's key credit metrics weaken to a level that no longer supports the "A" credit rating category (i.e., debt-to-capital above 65% and cash flow-to-debt below 12.5%) for a sustained period.
EARNINGS OUTLOOK
Given its regulated operations, Alectra's earnings have been relatively stable and predictable through the economic cycle. Morningstar DBRS expects the distribution revenue from Alectra's regulated business to grow in 2025 and 2026 in line with the inflationary-based rate adjustments. Over the medium term, Morningstar DBRS expects the proportion of earnings from nonregulated activities to remain at around 10% to 15% of EBITDA. However, if earnings from this segment exceed the 20% threshold on a sustained basis, this could negatively affect Alectra's BRA. Morningstar DBRS expects any volatility in earnings to largely be from (1) fluctuations in weather conditions and (2) the Company's nonregulated storm restoration business. Earnings from the nonregulated solar generation business should be relatively stable, given the long-term feed-in tariff contracts with the Independent Electricity System Operator.
FINANCIAL OUTLOOK
Alectra's FRA has remained stable and continues to be commensurate with the current "A" credit rating category. Morningstar DBRS expects the Company to continue to manage its capital expenditures (capex) and dividends in a prudent manner to maintain its key credit metrics in line with the current credit rating category. Morningstar DBRS expects Alectra's capex program going forward to focus predominantly on the regulated business (i.e., 95% of planned capex). While the capex on the nonregulated business ($100 million in 2024) was higher than normal because of one-time investments in the Company's gas generation and power restoration businesses, Morningstar DBRS expects the capex to remain below $20 million annually during the forecast period. As such, total capex should reduce to lower than $400 million in 2025 and 2026 from approximately $470 million in 2024. Morningstar DBRS will continue to monitor the Company's plans for its nonregulated businesses. Furthermore, Alectra is expected to file a new rebasing application with the OEB for period starting January 2027 (i.e. at the end of current rebasing deferral period), which could result in material changes to the rate base, capital structure, and capex requirements. Morningstar DBRS will review the application and the OEB's decision to determine the impact on Alectra's BRA and FRA.
CREDIT RATING RATIONALE
Alectra's credit ratings are supported by the stability of its regulated business, a strong franchise area with good growth, and its reasonable financial profile. The credit ratings are constrained by exposure to the Company's higher-risk nonregulated businesses as well as the operational challenges and performance pressure resulting from the incentive rate-setting mechanism.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Alectra, the BRA factors were considered in the order of importance contemplated in the methodology.
(B) Weighting of FRA Factors
In the analysis of Alectra, the FRA factors were considered in the order of importance contemplated in the methodology.
(C) Weighting of the BRA and the FRA
In the analysis of Alectra, the BRA carries greater weight than the FRA.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024), https://dbrs.morningstar.com/research/443429
Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.
The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025),
https://dbrs.morningstar.com/research/454196
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.
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@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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