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

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debentures of PowerStream Inc. (PowerStream or the Company) at “A” with Stable trends. The confirmation reflects the Company’s low business risk profile as a regulated electricity distributor operating under a reasonable regulatory framework and its reasonable financial risk profile with all key credit metrics commensurate with the current rating category.

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 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 (rated A (high) by DBRS). While PowerStream currently operates under the 3rd Generation Incentive Regulation Mechanism (IRM), the Company has indicated that it will transition to Custom Incentive Rate-setting (CIR) under Ontario’s Renewed Regulatory Framework effective January 1, 2016. Under CIR, PowerStream will be able to recover its return on investment in assets each year over the whole rate period rather than through periodic rebasing, reducing regulatory risk. Although the Company would be subject to a longer minimum term under this regime (five years versus four years under IRM), it will have the ability to initiate a regulatory review if actual return on equity (ROE) falls 300 basis points below the approved ROE. Additionally, DBRS notes that although the revenue decoupling rate design currently proposed by the Ontario Energy Board would improve the stability of PowerStream’s cash flow, this alone will not likely warrant a rating upgrade.

PowerStream’s financial risk profile remained reasonable for the last 12 months ending June 30, 2014, with all key credit metrics in the “A” rating range. While the higher level of debt used to fund the ongoing large capital expenditures (capex) for infrastructure renewal, distribution system expansion and the solar generation unit, PowerStream Solar, has resulted in modest deteriorations to the Company’s key credit metrics, they remain commensurate with the current rating category. Going forward, DBRS expects PowerStream to fund free cash flow deficits arising from the elevated level of capex 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.

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

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.