DBRS Confirms Ratings of Enersource Corporation, “A,” Stable Trends

DBRS has today confirmed the Issuer Rating and the rating of the Senior Unsecured Debentures of Enersource Corporation (Enersource or the Company) at “A” with Stable trends. The rating reflects the Company’s low business risk profile underpinned by a stable regulated electricity distribution business in a strong franchise area, and its reasonable financial profile.

Enersource Hydro Mississauga Inc. (EHM; the regulated utility, 95% of EBIT in 2013) operates under a reasonable regulatory framework in a strong franchise area and generates predictable earnings and cash flow. Under the Ontario Energy Board’s (OEB) Renewed Regulatory Framework, EHM has adopted the 4th Generation Incentive Rate-Setting (IR) to set rates for 2014, with an option to rebase for 2017. Until 2013, EHM operated under the 3rd Generation IR framework, which was similar to the current regulatory framework, except that the 4th Generation IR has a longer period (five years, versus four years), modestly increasing regulatory risk as EHM is required to forecast expenditures for five years, and if the OEB does not provide reasonable or timely recovery of costs and capex. However, like its peers in Ontario, EHM has the option to initiate a regulatory review of the IR application if actual return on equity (ROE) falls 300 basis points (bps) below the approved ROE, providing downside protection.

The OEB released a decision on EHM’s application for new rates under the 4th Generation IR in December 2013. Distribution rates effective January 1, 2014, were set based on 2013 rates adjusted for a price cap adjustment of 1.55% (price escalator of 1.7%, productivity factor of 0% and stretch factor of 0.15%). During the IR period, EHM will be allowed to earn a reasonable ROE of 8.93% on deemed equity thickness of 40%, the same as during 2013. Earnings are expected to be relatively stable during the IR period, as DBRS views earnings pressure to be manageable given that the rate adjustment parameters for productivity and stretch factor are reasonable at 0% and 0.15%, respectively.

The Company’s financial profile continues to be reasonable, and credit metrics (last 12 months ended March 31, 2014: debt to capital 52.8% and cash flow to total debt 17.0%) have remained consistent with the 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 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.