DBRS Confirms Enersource Corporation at “A” with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of Enersource Corporation (Enersource or the Company) at “A” with Stable trends. The confirmation reflects the stability of Enersource’s regulated electricity distribution business, which operates under a reasonable regulatory framework and in a strong franchise area. The Company’s financial risk profile also remains reasonable with key credits metrics that are supportive of the current ratings.

On April 17, 2015, Enersource, PowerStream Inc. (Powerstream; rated “A” with a Stable trend by DBRS) and Horizon Utilities Corporation (Horizon) jointly announced their intention to merge and create a new, larger utility (the New Entity) in order to purchase Hydro One Brampton Networks Inc. (HOBNI; 100% owned by Hydro One Inc., which is rated A (high) with a Stable trend by DBRS) from the Province of Ontario (rated AA (high) with a Stable trend by DBRS) for either a 17% interest in the New Entity or for $607 million in cash (see the DBRS press release, DBRS Comments on Proposed Merger Involving PowerStream and Enersource, dated April 17, 2015, for more details.) As per the Ontario Energy Board’s (OEB) report on Rate-Making Associated with Distributor Consolidation, Enersource will continue to operate under its current Price Cap Incentive Rate-setting method following the merger and acquisition (M&A), and will be eligible to file incremental capital modules to recover its capital expenditures on an annual basis, reducing regulatory lag. Additionally, Enersource, PowerStream, Horizon and HOBNI will be able to defer rebasing for up to ten years following the M&A, allowing the New Entity to keep all efficiency gains for five years before being subject to a customer sharing mechanism of any returns in excess of 300 basis points above the allowed return on equity for the latter five years. These efficiency gains are expected to be realized by eliminating duplication in equipment and facilities, which should result in lower operating costs. DBRS notes, however, that integration risk following the M&A could be a challenge, as the New Entity must adopt uniform systems, such as for billing, enterprise resource planning and electricity grid management, in order to achieve cost savings.

Enersource’s financial risk profile continues to be reasonable with key credit metrics that have remained supportive of the current rating category. DBRS notes that Enersource’s debt-to-capital ratio of 51.5% as of March 31, 2015, provides the Company with some financial flexibility to fund its share of the potential HOBNI acquisition. Following the M&A, DBRS expects the New Entity to maintain its leverage in line with the regulatory capital structure, and other key credit metrics – cash-flow-to-debt and interest coverage – within the “A” rating range. However, should the New Entity’s key financial ratios deteriorate to a level that is not commensurate with the “A” rating category, negative rating action may occur.

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 (October 2014), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.