DBRS Confirms ENMAX Corporation at A (low), Stable

DBRS has today confirmed ENMAX Corporation’s (ENMAX or the Company) Issuer Rating, Unsecured Debentures and Commercial Paper at A (low), A (low) and R-1 (low), respectively. All trends are Stable. 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.

The Company’s business risk profile is viewed as solid as regulated operations (28% of EBIT) operate under relatively stable, albeit evolving, regulatory frameworks, while merchant generation operations in Alberta benefit from a pricing premium relative to other nearby markets (typically $20 per megawatt hour). The pricing premium is driven by: (1) Alberta’s limited interconnections with adjacent provinces and states; (2) the generation companies within the Alberta electricity market, which have historically been disciplined in their supply strategies; and (3) the relatively weaker production reliability in the province, driven by the aging coal plants. However, the Sundance A restart (560 MW), 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 in the near to medium term. In addition, the uncertainty regarding the capital tracker mechanism for the recovery of certain capex under the new performance-based regulation (PBR) framework could increase regulatory risk. In September the Alberta Utilities Commission approved the transition to PBR for electric distribution utilities in Alberta. The current rating is based on DBRS’s expectation that the transition to PBR will not have a material impact on the credit profile of ENMAX.

In December 2012, ENMAX entered into a joint partnership (JV) with Capital Power L.P. (CPLP; rated BBB) in the development of the Shepard Energy Centre (Shepard), an 800 MW natural gas facility with a construction budget of approximately $1,365 million. CPLP is expected to invest approximately $860 million, including financing costs. DBRS expects that the funding from the Shepard JV will alleviate the Company’s capex funding requirements in the short term. As a result, the Company’s debt-to-capital is expected to decrease below the current 45% level in the short to medium term, which is commensurate with ENMAX’s ratings. In addition, in April 2013, ENMAX announced the sale of ENMAX Envision, a non-core asset, for approximately $225 million. Proceeds from the divestiture are expected to strengthen the Company’s current financial position. Going forward, DBRS expects ENMAX to maintain its key credit metrics in line with its current rating category.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011) and Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), which can be found on our website under Methodologies.