DBRS Updates Its Report On Enersource Corporation

DBRS has today updated its report on Enersource Corporation (Enersource or the Company). The credit profile of Enersource reflects the Company’s strong credit metrics and its low business risk 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. The Company’s distribution rates are set by the Ontario Energy Board (OEB), using a combination of an annual incentive regulation mechanism (IRM; 2009 to 2012) and periodic cost-of-service (COS) reviews (2013 is the rebasing year). On April 27, 2012, EHM submitted a COS application for rates effective January 1, 2013, and an incremental capital and return application (ICR) for January 1, 2014. The current rating is based on DBRS’s expectation that the implementation of the COS and ICR regulatory framework will not have a material impact on the credit profile of Enersource Corporation.

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 the first quarter ended March 31, 2012 (Q1 2012), EBIT interest coverage (1.94 times) and cash flow ratios (14.5%) were also supportive of the “A” rating for Enersource.

Enersource’s cash flow is expected to be sufficient to cover capital expenditures (capex) and dividends in the next several years, irrespective of the ruling from the recent COS filing. This is largely due to Enersource’s relatively modern infrastructure, which does not require a significant level of capital spending on repairs and upgrades facing many distributors in Ontario over the next few years. As a result of the adoption of International Financial Reporting Standards (IFRS) in 2012, the Company had an independent study conducted to evaluate the useful lives of its depreciable assets. This study resulted in the revision of the useful life assessments of many of its depreciable assets, reducing current and future depreciation expense and, therefore, reducing cash flow ratios. However, credit metrics are expected to remain well within the “A” rating category.

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.