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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of ENMAX Corporation (ENMAX or the Company) at A (low), as well as its Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmation reflects DBRS’s expectations that: (1) ENMAX’s regulated utility business, which accounted for approximately 43% of earnings in 2015, will continue to provide relatively stable earnings and cash flow. (2) ENMAX’s non-regulated business will continue to benefit from its highly integrated business model. ENMAX’s electricity retail operations act as a natural hedge against ENMAX’s electricity generation segment, mitigating weak generation profitability amid oversupply and lackluster demand. ENMAX is the largest electricity retailer in Alberta with a market share (by consumption) of around 35%. (3) Financial support from ENMAX’s shareholder, the City of Calgary (the City; rated AA (high)) will remain intact. The majority of the Company’s debt is held by the City ($1,211 million as at December 31, 2015; 71% of ENMAX’s total long-term debt). This funding arrangement alleviates capital market funding requirements for the Company. (4) ENMAX’s overall key credit metrics will remain within the “A” rating category, considering a mix of the regulated and non-regulated businesses. However, the continued weak wholesale power pricing environment could result in a negative rating action in the medium term if the challenging market condition deteriorates ENMAX’s key credit metrics.

ENMAX’s regulated transmission and distribution businesses have generated relatively predictable earnings and cash flow. DBRS expects earnings from the regulated business will benefit from its growing rate base. A significant upcoming regulatory decision is the Generic Cost of Capital for 2016 and 2017, which is anticipated in September 2016. DBRS notes that, excluding Crown corporations, the current approved return on equity (ROE) is the lowest among North American utilities, and equity thickness is one of the lowest compared with the peers. DBRS believes that any further weakness in the approved ROE or leverage ratio will put negative pressure on the credit quality of ENMAX.

DBRS expects ENMAX to focus on growing its regulated assets while scaling back capital investment (capex) plans for the non-regulated electricity generation segment (including the Genesee 4 and 5 natural gas-fired combined cycle project) until the Government of Alberta (the Province; rated AAA) clarifies Alberta’s Climate Leadership Plan (ACLP), which has introduced significant uncertainty around new project economics. Executing large power project development strategies in the weak price environment could constrain liquidity, profitability and leverage, as well as elevating the excess supply condition. With a slowdown in capex for the non-regulated electricity generation business, ENMAX’s free cash flow is expected to be relatively neutral in 2016; thus, ENMAX is not expected to issue any new debt this year. Under the modest capex plan, ENMAX’s financial risk profile is expected to remain reasonable, with all key financial ratios commensurate with the current rating category over the next twelve months.

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 Rating Companies in the Independent Power Producer Industry, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

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