DBRS Assigns Provisional Ratings to Alectra Inc.

DBRS Limited (DBRS) has today assigned a provisional Issuer Rating of “A” to Alectra Inc. (Alectra or the Company) and a provisional rating of “A” to the Company’s Senior Unsecured Debentures, both with Stable trends. Alectra is expected to be formed effective February 1, 2017, resulting from the merger of PowerStream Holdings Inc. (PowerStream; PowerStream’s electricity distribution company, PowerStream Inc., is rated “A,” Under Review with Developing Implications by DBRS), Enersource Holdings Inc. (Enersource; Enersource’s flagship subsidiary, Enersource Corporation, is rated “A,” Under Review with Developing Implication by DBRS) and Horizon Holdings Inc. (Horizon). Alectra’s planned purchase of Hydro One Brampton Networks Inc. (HOBNI; rated “A,” Stable trend by DBRS) remains on track to be completed on February 28, 2017. The outstanding Senior Unsecured Debentures of PowerStream Inc., Enersource Corporation and Horizon will be assigned to Alectra upon completion of the merger anticipated on February 1, 2017.

The merger and the subsequent planned purchase of HOBNI (together, the Transaction) support a business risk assessment of “A” for Alectra, underpinned by a reasonable regulatory regime in Ontario. Alectra is expected to benefit from operating efficiencies and cost savings as well as a bigger geographic footprint. Under the current regulatory regime, shareholders retain the benefit of operating synergies following a merger for up to ten years. The Transaction will result in the establishment of the second-largest municipally owned electricity-distribution company in North America in terms of customer count, with nearly one million customers.

On December 8, 2016, the Ontario Energy Board approved Alectra’s Mergers, Acquisitions, Amalgamations and Divestitures application with no change from the initial submission filed in April 2016. As a result, Alectra’s financial risk assessment is expected to be A (low). Key financial metrics are expected to be weaker than they otherwise would have been had Enersource, PowerStream and Horizon remained stand-alone entities as a result of the following:

(1) Incremental debt associated with the acquisition of HOBNI: The purchase price is expected to be approximately $607 million and funded with materially higher leverage at 70% (versus Ontario-based utilities’ deemed capital structure of 60% debt and 40% equity);
(2) Material acquisition premium ($202 million) to HOBNI’s rate base ($405 million): The acquisition premium will not be added on to the rate base, and as such, there will be no recovery of the acquisition premium through rates; and
(3) Upfront merger costs: Cost savings will be spread over the ten-year rebasing deferral period.

Overall, Alectra’s credit quality is expected to remain reasonable at “A,” albeit with limited financial flexibility, as overall key financial ratios are expected to be at the lower end of the “A” rating range.

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

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.