DBRS Updates Its Report on ENMAX Corporation

DBRS has today updated its report on ENMAX Corporation (ENMAX or the Company). The Company’s financial profile remained reasonable in the six months ended June 30, 2013 (H1 2013), mainly as a result of the sale of its Envision subsidiary and the disposal of 25% of the Shepard project (approximately $484 million in proceeds combined), which helped ENMAX to alleviate its capital expenditure (capex) funding requirements. In December 2012, ENMAX entered into a joint venture (JV) with Capital Power L.P. (CPLP; rated BBB) in the development of the Shepard Energy Centre (Shepard), an 800 megawatt (MW) natural gas facility with a construction budget of approximately $1,365 million ($1,065 million incurred to date). CPLP is expected to invest approximately $860 million, including financing costs. In H1 2013, the Company received $261.9 million in proceeds from CPLP, with the second tranche expected to close by Q1 2014. In addition, $221.9 million in proceeds were received from the sale of its Envision subsidiary.

The sale of the Envision subsidiary contributed to a $176 million gain, which helped to strengthen the Company’s equity base. However, this was partially offset by negative impacts associated with the unplanned outage at Keephills Unit 1 generator. The increase in the equity base, combined with a modest decrease in debt levels, resulted in a lower debt-to-capital ratio in H1 2013 (43% from 45% in 2012). Going forward, although the Keephills outage will likely continue to pressure earnings in the latter half of 2013, it is expected to return to service in October 2013 with minimal implications on credit metrics. DBRS expects ENMAX will continue to maintain its key credit metrics in line with its current rating category.

The Company’s business risk profile is viewed as solid, as regulated operations operate under relatively stable, albeit evolving, regulatory frameworks, while merchant generation output in Alberta benefits from a pricing premium relative to other nearby markets (typically $20 per MW hour). However, the Company is also subject to the volatile wholesale pricing environment in Alberta, as seen in Q2 2013 when prices peaked. As supply levels continue to vary as a result of planned and forced outages, combined with increases in demand, power prices are expected to continue to remain volatile in the near term. In addition, the Sundance A restart (560 MW), expected in late 2013, could once again place significant pressure on merchant power prices. As a result, the Company may see greater volatility in its earnings and cash flow in the near to medium term. Nevertheless, ENMAX continues to grow its regulated business as a result of major Alberta Electric System Operator (AESO)-directed transmission projects and new distribution projects required to meet load growth.

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

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.