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

DBRS has today confirmed the Issuer Rating, Unsecured Debentures and Commercial Paper ratings of ENMAX Corporation (ENMAX or the Company) at A (low) and R-1 (low), respectively, all with Stable trends. The ratings are based on ENMAX’s stable operating cash flow from its regulated transmission and distribution operations, as well as its reasonably balanced power generation and supply operations, which act as a natural hedge against movements in power prices. Two main challenges for ENMAX are (1) increasing pressure on the balance sheet to fund new plant development, particularly the 800 megawatt (MW) Shepard Energy Center (Shepard), and (2) an expected increase in its reserve capacity margin, as a result of the Sundance A restart scheduled for late 2013. This is expected to increase the reserve margin by 3% to around 20% (based on the Alberta Electric System Operator (AESO) forecast), which could potentially weaken wholesale prices materially.

DBRS is increasingly concerned about the continued challenging developments involving Shepard, which is expected to enter commercial operation in 2015. DBRS had previously assumed that ENMAX would seek a joint venture partner to finance a portion of the capital requirements for Shepard. However, with the expected restart of Sundance A, the Alberta merchant market environment outlook has changed and it would be challenging for ENMAX to find a joint venture partner. Assuming ENMAX owns 100% of Shepard, its leverage is expected to peak at 50% before gradually decreasing to the current 45% level. ENMAX is expected to have very limited financial flexibility once it reaches 50% leverage. Should leverage exceed 50%, DBRS will likely take a negative credit rating action.

Furthermore, the increasingly challenging merchant power market environment could materially add to ENMAX’s existing challenges. The Sundance A restart, which is expected in late 2013, could place significant pressure on the merchant power market environment in Alberta and negatively offset ENMAX’s operating performance during the Shepard construction period. In order to preserve its balance sheet strength if earnings weaken materially, DBRS expects ENMAX to manage its capital investments and curtail capital expenditures (capex).

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.