DBRS Confirms Enersource Corporation at “A”, Stable Trends

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Enersource Corporation (Enersource or the Company) at “A”, both with Stable trends. The confirmation is based on the Company’s strong credit metrics and its low-risk business profile, with approximately 90% of EBIT generated from the regulated power distribution business, Enersource Hydro Mississauga Inc. (EHM).

Enersource’s low business risk profile is underpinned by a reasonable regulatory system. Enersource’s distribution rates are set by the Ontario Energy Board (OEB) using a combination of an annual incentive regulation mechanism (IRM; 2009 to 2013) and periodic cost-of-service (COS) reviews (2013 is the rebasing year). In DBRS’s view, IRM typically creates higher cost-cutting pressure than COS does; however, the cost pressure has not resulted in a material reduction in the Company’s earnings and cash flows.

Enersource’s credit metrics have remained strong for the current rating category. Although the regulatory capital structure is 60% debt and 40% equity, Enersource has maintained its leverage in the mid-55% range, providing for good financial flexibility. For 2011, EBIT interest coverage (2.7 times) and cash flow ratios (14.7%) were also supportive of the “A” rating for Enersource.

Credit metrics are expected to remain well within the “A” rating category. Enersource’s cash flow is expected to be sufficient to cover capital expenditures (capex) and dividends in the next several years. This is largely due to Enersource’s relatively modern infrastructure, which does not require a significant level of capital spending on repairs and upgrades that many distributors in Ontario face over the next few years. In anticipation of the Company’s adoption of International Financial Reporting Standards (IFRS) in 2012, Enersource had an independent study conducted to evaluate the useful lives of its depreciable assets. As a result of this study, the Company revised the useful lives of many of its depreciable assets, reducing current and future depreciation expense and, therefore, reducing cash flow ratios. Enersource also has a significant amount of cash on its balance sheet ($107 million) largely from the surplus as a result of its recent debt refinancing.

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 the DBRS website under Methodologies.