DBRS Places PowerStream and Enersource Under Review with Developing Implications Following Shareholder Approval on Proposed Merger

DBRS Limited (DBRS) has today placed all ratings of PowerStream Inc. (PowerStream) and Enersource Corporation (Enersource) Under Review with Developing Implications. In April 2015, PowerStream, Enersource, and Horizon Utilities Corporation jointly announced their intention to merge and create a new, larger utility (the New Entity) in order to purchase Hydro One Brampton Networks Inc. (Hydro One Brampton; rated “A” with a Stable trend) for either cash in the amount of $607 million or give a 17% equity stake of the New Entity to the Province of Ontario (rated AA (low) with a Stable trend). The proposed merger and purchase of Hydro One Brampton (the Transaction) are in line with the recommendation from the Premier’s Advisory Council on Government Assets.

The rating actions today follow the announcement that the Transaction has received approval from all shareholders, including Markham City Council, which voted in favour of the Transaction yesterday. The Transaction requires regulatory approval by the Ontario Energy Board (OEB).

The Transaction, as it currently stands, could have a modestly positive impact on the business risk assessment of the utilities as it is expected to create meaningful synergetic benefits. Under the current regulatory regime, shareholders retain the benefit of operating synergies following a merger for up to ten years. However, these operating efficiencies could be neutralized should the OEB impose a higher efficiency target on the New Entity or pass through incremental operating cost savings to ratepayers. Furthermore, the New Entity will be exposed to integration and early rebasing risk. Where a rate application is required before ten years, synergetic benefits would be less than projected.

Currently, it is uncertain as to how the Transaction will be financed. As a result, DBRS has placed the ratings of PowerStream and Enersource Under Review with Developing Implications. DBRS will further review the New Entity’s financing plan when it is finalized. Upon final review, if the Transaction is financed in such a way that the New Entity’s leverage exceeds the regulatory capital structure (60% debt and 40% equity) and its other key credit metrics — cash flow-to-debt and EBIT interest coverage ratios — fall below the “A” rating range (12.5% to 17.5% for cash flow-to-debt and 1.8 times (x) to 2.8x for EBIT interest coverage) without corrective action within a reasonable time frame, then a negative rating action could 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.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015), which can be found on our website under Methodologies.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.