DBRS Confirms ENMAX Corporation at A (low), R-1 (low), Stable Trends

DBRS has today confirmed the Unsecured Debentures rating of ENMAX Corporation (ENMAX or the Company) at A (low) and its Commercial Paper rating at R-1 (low), both with Stable trends. The ratings are based on ENMAX’s earnings and cash flow stability from its regulated transmission and distribution operations and a well-hedged non-regulated business backed by a low-cost source of electricity. These strengths are offset by increased business risk stemming from exposure to higher-risk non-regulated activities, particularly investment in owned power generation.

ENMAX’s regulated segment, which accounts for 26% of its adjusted EBIT, continues to experience growth as a result of major Alberta Electric System Operator (AESO)-directed transmission projects required to meet load growth within Calgary and to replace aging infrastructure. The non-regulated segment, which currently represents approximately 74% of EBIT, is well hedged by the Company’s owned or low-cost contracted power generation. Currently, ENMAX produces or has exclusive access to approximately 2,067 megawatts (MW) of low-cost generation, providing a natural hedge for its fixed-priced load portfolio. ENMAX’s strategy is to employ a vertically integrated business model in the non-regulated business, where the Company controls the production, delivery and customer interface for its electricity products.

ENMAX continues to maintain its strong presence in the Alberta retail electricity market, with market share of 36% measured by volume (excluding volumes contracted or for which the Company acts as agent), driven by the continued success of its EasyMax program and a high customer retention rate due to relatively limited competition despite deregulation.

The Company continues to expand its non-regulated activities, particularly in acquiring and building additional energy supply to meet expected retail demand and/or replace maturing supply contracts. The arrangement for two of the Battle River units (295 MW) runs until December 2013, and a portion of ENMAX’s proposed generation facilities is expected to replace this capacity.

Expansion of its generation business introduces construction and development risk (availability of construction materials, labour and equipment), and the Company does not have an extensive track record of managing large-scale greenfield generation build-out projects. The Company has started construction activities on the 800 MW Shepard Energy Centre (Shepard), which is expected to enter commercial operation in 2015. The Company remains focused on taking appropriate steps to mitigate the construction risk and financial risk associated with a project of this size, such as securing fixed-priced contracts for engineering, design and procurement. ENMAX continues to examine the potential for a 50% equity partner and other forms of funding such as non-core asset sales to mitigate the financial risk of the Shepard project.

Given Shepard’s significant size, ENMAX’s ability to take appropriate steps in a timely fashion to minimize the impact of the financial risk of the project on its credit profile remains important for the current credit rating to be maintained. As a significant portion of capital expenditures is expected to be funded out of cash flow, any cash flow weakness could affect the amount of debt utilized and negatively impact the financial profile. DBRS does not expect a material increase in debt based on the assumption that a partner/potential non-core asset disposal is utilized for Shepard. DBRS does not expect the Company’s consolidated debt-to-capital to exceed 50% during the build-out stage.

ENMAX liquidity remains adequate with access to $900 million in credit facilities at the end of September 30, 2011.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.