DBRS Confirms Enersource Corporation at “A”, Stable Trends

DBRS has confirmed the rating of the Senior Unsecured Debentures and Issuer Rating of Enersource Corporation (Enersource or the Company) at “A,” both with Stable trends. The confirmation reflects the Company’s low business risk profile and relatively stable earnings, 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, 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 renewed regulatory framework in Ontario will not have a material impact on the credit profile of Enersource (see DBRS commentary: No Real Credit Substance in the Ontario Energy Board’s Report on Renewed Regulation Framework for Electricity Distributors dated October 19, 2012).

For the six months ended June 30, 2012 (H1 2012), Enersource generated a negative free cash flow of approximately $16 million, which was mainly due to the one-time purchase of a new administration building that increased capex by $16 million. Capex, without the purchase of a new administration building, in H1 2012 remained relatively stable compared to H1 2011. The free cash flow deficit was financed with cash and cash equivalents on hand. Enersource’s earnings and cash flow from operations is expected to continue to face cost-cutting pressures going forward. However, DBRS does not expect Enersource to be challenged by capex spending in the near to medium term, as its infrastructure is relatively modern and does not require extensive on repairs and upgrades. As a result, the Company is expected to maintain its capital structure within the regulatory capital structure of 60% debt and 40% equity (53.8% in H1 2012), which provides the Company with good financial flexibility.

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.