DBRS Confirms PowerStream Inc. at “A,” Stable Trend

DBRS has today confirmed the Issuer Rating of PowerStream Inc. (PowerStream or the Company) at “A” with a Stable trend. The rating reflects the Company’s low-risk, regulated electricity distribution operations, its solid financial profile and a strong franchise area with a favourable customer mix.

The business risk profile has improved following the merger with Barrie Hydro Distribution Inc. (Barrie Hydro) in 2009, providing a much larger customer base, greater diversification and strong population growth in the Barrie area. The Company currently operates in the last year of the four-year Incentive Regulation Mechanism (IRM), which is viewed by DBRS as reasonable and stable, allowing PowerStream to recover purchased power costs on a timely basis. A cost-of-service application was filed in 2012 for rates effective January 1, 2013. Return on deemed equity investment (ROE) is expected to increase in the rebasing year in accordance with the Ontario Energy Board’s (OEB) approval. In addition, the Company was allowed to recover capital expenditures associated with smart meter in 2008 and 2009 through a rate rider, effective January 2010 and January 2011, which is viewed as a positive factor by DBRS.

The Company’s financial profile remained strong and stable, underpinned by improved earnings and strong cash flow, as a result of customer growth and operational efficiency achieved under IRM. However, debt levels were higher in 2011 than in previous years, due to the financing of free cash flow deficits as a result of higher capex toward maintaining system capacity and reliability. Despite higher debt levels, the Company’s credit metrics remained strong in 2011 and were commensurate with the “A” rating category.

The confirmation incorporates DBRS’s expectation that the Company remains committed to maintaining its debt-to-capital ratio in line with the regulatory 60% debt to 40% equity structure, and that should the debt leverage rise above the regulated capital structure, the Company will take necessary measures to restore its structure to the 60% debt level in a timely manner. DBRS notes that the $125 million debt (or 30% of total debt outstanding) owed to Electricity Distributors Finance Corporation (EDFIN) matures in August 2012. However, DBRS believes that refinancing risk is minimal, given the Company’s strong credit profile. PowerStream is in the process of financing a $125 million credit facility to mitigate its refinancing risk with the EDFIN Debentures.

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

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