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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures of PowerStream Inc. (PowerStream or the Company) at “A” with Stable trends. The rating action reflects (1) the Company’s low business risk assessment (BRA) – predominately a regulated electricity distributor; and (2) the Company’s reasonable financial risk assessment (FRA) with overall key credit metrics commensurate with the current rating category, albeit weakened over the past several years. DBRS expects PowerStream’s key credit metrics to improve in 2016 once rate base additions from the 2013 and 2015 period are reflected in distribution rates under the Custom Incentive Rate-setting (CIR) plan effective January 1, 2016. Consequently, DBRS expects the distribution rate to rise above 10% in 2016 from 2015 which in turn, should improve operating cash flow favourably. Since the proposed merger involving PowerStream (Transaction) is subject to negotiation of a definitive agreement that must be approved by all shareholders, DBRS will treat the Transaction as an event and further assess credit implications of the Transaction as more information becomes available (see “DBRS Comments on Proposed Merger Involving PowerStream and Enersource”, dated April 17, 2015).

PowerStream’s BRA has remained in the “A” rating range and DBRS does not anticipate any material change in the Company’s BRA in the foreseeable future. The Company’s low risk, regulated distribution operations are expected to account for approximately 90% of consolidated earnings in 2015. The remaining portion of consolidated earnings is contributed by PowerStream’s non-regulated segments, primarily solar generation which offers higher potential returns, but also entails higher risks. Should earnings from the non-regulated business exceed the 20% threshold, PowerStream’s BRA could be negatively affected.

Transitioning to the CIR under Ontario’s Renewed Regulatory Framework is not expected to materially affect PowerStream’s BRA. DBRS acknowledges that there are challenges associated with the CIR such as preparing multi-year forecasts and managing unforeseen discrepancies between forecast and actual costs, which could create earnings and cash flow volatility. However, this risk is mitigated by the following: (1) the ability of the Company to initiate a regulatory review if actual return on equity (ROE) falls 300 basis points (bps) below the approved ROE; (2) the CIR offers the ability to rebase capital investments (capex) in timely manner and recover its return on investments during the CIR period, reducing the regulatory lag associated with capex; and (3) DBRS notes that the revenue decoupling rate design by the Ontario Energy Board (OEB) would improve the stability of PowerStream’s earnings and cash flow.

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.