DBRS Confirms PowerStream Inc. at “A”, Stable

DBRS has today confirmed the Issuer Rating and rating of the Senior Unsecured Debentures of PowerStream Inc. (PowerStream or the Company), both 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.

PowerStream’s business risk profile is viewed as strong, as most of the Company’s earnings are generated from its low-risk regulated power distribution business operating under a supportive, albeit evolving, regulatory system. PowerStream operated under the 3rd Generation Incentive Regulatory Mechanism (IRM; 2009-2012) and rebased in 2013 using a cost-of-service (COS) methodology. In its COS proceeding, the Ontario Energy Board (OEB) approved an increase in rate base to $832 million ($795 million in 2012) and a reasonable return on equity (ROE) of 8.93% (8.01% in 2012). This approval is expected to lead to a modest increase in earnings and cash flow going forward. In October 2012, the OEB released its report on the renewed regulatory framework for electricity distributors in Ontario. Under this new framework, DBRS expects PowerStream to either transition to the 4th Generation Incentive Regulation (IR) or the Custom IR framework, due to its large capex program. Although these frameworks have longer IR periods (four-plus years, versus three years), which increases regulatory risk, PowerStream is provided with downside protection, as it has the option to initiate a regulatory review of the IR application if actual ROE is 300 basis points (bps) less than the approved ROE. However, there remain some uncertainties relating to key factors within the IR framework, and the OEB is expected to release details on these factors in mid-2013. Should these factors increase regulatory risk (e.g., aggressive efficiency targets), there could be negative rating implications.

PowerStream’s exposure to non-regulated operations is manageable, as power price risk has been effectively mitigated by having long-term contracts with creditworthy parties. Although the Company expects to grow its non-regulated operations over the medium term, DBRS expects that regulated operations will still account for approximately 90% of consolidated earnings going forward. In addition, with a large planned capex program over the short to medium term, DBRS expects the Company to fund its expected free cash flow deficits prudently to maintain its key credit metrics in line with the current rating. Although earnings and cash flow decreased moderately in 2012 during the final year of the IRM period, leading to a decline in interest coverage and cash flow-to-debt ratios, the rebasing of rates for 2013 will likely lead to an improvement in the key credit metrics.

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 methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.