DBRS Confirms ENMAX Corporation at A (low) and R-1 (low), Stable Trends

DBRS has today confirmed the Issuer Rating and Unsecured Debentures of ENMAX Corporation (ENMAX or the Company) at A (low) and its Commercial Paper at R-1 (low), all with Stable trends. The confirmation reflects the Company’s relatively stable regulated electricity distribution and transmission operations, its reasonable financial risk profile and integrated energy operations that provide a natural hedge against the volatile Alberta electricity pricing environment.

ENMAX’s business risk profile is supported by the stable earnings and cash flow provided by the Company’s regulated operations and the reasonable regulatory environment in Alberta. Following the completion of its formula-based ratemaking (FBR) plan in 2013, ENMAX’s transmission division will be moving back to a cost-of-service (COS) methodology while its distribution division will be transitioning to the performance-based regulation (PBR) framework. The Company’s transmission division, which had been unable to earn its allowed return on equity under FBR prior to the re-opener decision, should see improvements in its earnings under COS as it is more suited for operations that require large and lumpy capital expenditures. The transition to PBR for the distribution division is additionally not expected to have a material impact on the Company’s credit profile.

In May 2014, the Company announced the acquisition of 170 megawatts of generation from Encana Corporation (see DBRS press release, “DBRS Comments on ENMAX’s Purchase of Cavalier and Balzac Power Plants,” dated May 22, 2014). DBRS views the transaction as slightly negative to ENMAX’s business risk profile because it will increase the proportion of earnings from the Company’s unregulated segment. Furthermore, the acquired power plants are uncontracted assets that are subject to the merchant power market, which increases ENMAX’s exposure to volatile Alberta energy prices. DBRS expects this to be partially mitigated, however, by the Company’s energy supply business load growth.

ENMAX’s financial risk profile remains reasonable, with all key financial ratios commensurate with the current rating category. Going forward, the Company’s key ratios should benefit from higher earnings and cash flow from regulated operations after the Company rebases for rates effective January 1, 2014; however, earnings from the unregulated segment will remain volatile due, in part, to the lower wholesale power prices expected in Alberta over the short term as a result of capacity added in 2013 and expected to be added in 2015. Overall, DBRS expects the Company to maintain key metrics in line with its current ratings.

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 methodologies are DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, Rating Companies in the Non-Regulated Electric Generation Industry and 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.

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