DBRS Comments on ENMAX’s Purchase of Cavalier and Balzac Power Plants

DBRS notes that ENMAX Corporation (ENMAX or the Company; rated A (low) with a Stable trend) has today announced the purchase of the Cavalier power plant and a 50% interest in the Balzac power plant from Encana Corporation (the Transaction). The Transaction, which will add 170 megawatts of gas-fueled generation in Alberta to ENMAX’s portfolio, is not expected to be material to the Company’s overall assets and EBITDA.

(1) BUSINESS RISK PROFILE – Slightly Negative
DBRS views the Transaction as slightly negative for ENMAX’s business risk profile as it will increase the proportion of earnings from the Company’s unregulated segment. Furthermore, the Cavalier and Balzac power plants are uncontracted assets that are subject to the merchant power market, which increases the Company’s exposure to volatile Alberta energy prices. However, DBRS expects this to be partially mitigated by the Company maintaining its total hedged output at current levels following the Transaction. Additionally, the Transaction will only represent approximately 10% of total generation and power purchase agreements on a capacity basis. In 2013, generation and power purchase agreements contributed around 60% of EBITDA, and DBRS expects the Transaction to contribute approximately 6% of ENMAX’s consolidated EBITDA.

(2) FINANCIAL RISK PROFILE – Uncertain
The impact of the Transaction on ENMAX’s financial risk profile is uncertain as the Transaction price has not been announced publicly and the financing strategy has yet to be determined. DBRS expects the Company to maintain its key credit ratios within the current rating category following the Transaction. In the event that key credit metrics significantly weaken, negative rating action could occur.

Notes:
The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (January 2014), Rating Companies in the Non-Regulated Electric Generation Industry (January 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.

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