DBRS Confirms PowerStream Inc. at “A”, Stable Trend

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debentures of PowerStream Inc. (PowerStream or the Company) at “A” with Stable trends. The ratings reflect the low business risk profile associated with PowerStream’s stable regulated electricity distribution business, as well as its reasonable financial profile.

PowerStream’s business risk profile is indicative of the “A” rating category, supported by distribution operations in a strong franchise area and a reasonable regulatory framework. The Company’s regulated business is expected to continue to account for over 90% of total earnings and cash flows. Volatility from the non-regulated segments also remains manageable as power price risk has been effectively mitigated through long-term contracts with the Ontario Power Authority (OPA; rated A (high)). Given the Company’s significant capital spending requirements, DBRS expects PowerStream to transition to Custom Incentive Rate-setting (CIR) under Ontario’s Renewed Regulatory Framework from the current 3rd Generation Incentive Regulation Mechanism (IRM) when it next rebases. DBRS views CIR as appropriate for those distributors, such as PowerStream, with large, broad, multi-year capital expenditures that require certainty of funding in advance. DBRS notes that some concerns regarding key factors of the renewed framework, such as efficiency targets and the recovery and pass-through of capital costs to ratepayers, have eased after the late-2013 release of the Ontario Energy Board’s (OEB) report on rate setting parameters and benchmarking. However, there remains uncertainty regarding what the OEB may approve under the renewed framework. Additionally, PowerStream may face moderately higher regulatory risk under CIR as this regime has a minimum term of five years versus four years under IRM, potentially resulting in greater regulatory lag. This is partially mitigated by the ability for the Company to initiate a regulatory review if actual return on equity (ROE) falls 300 basis points below the approved ROE.

PowerStream’s financial risk profile is reflective of the “A” rating category, with all credit metrics in the “A” rating range. While large capital spending is planned for the medium-term, DBRS expects PowerStream to continue to fund free cash flow deficits through a mix of debt and equity in order to maintain its debt leverage in line with the regulatory capital structure.

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 Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.