DBRS Maintains PowerStream Inc.’s Under Review with Developing Implications Status

DBRS Limited (DBRS) has today maintained its status of Under Review with Developing Implications on the “A” Issuer Rating and Senior Unsecured Debentures of PowerStream Inc. (PowerStream or the Company). This rating action has been in place since November 20, 2015, following the announcement that a proposal to merge PowerStream, Enersource Corporation (rated “A” by DBRS) and Horizon Utilities Corporation and jointly acquire Hydro One Brampton Networks Inc. (HOBNI; rated “A” by DBRS) received approval from all shareholders. The proposed merger and purchase of HOBNI (the Transaction) is in line with the recommendation from the Premier’s Advisory Council on Government Assets. The Transaction requires regulatory approval by the Ontario Energy Board (OEB), which is anticipated by the end of 2016.

The Transaction, as it currently stands, could have a modestly positive impact on the business risk assessment (BRA) of the Company as the Transaction is expected to create meaningful synergetic benefits. Under the current regulatory regime, shareholders can retain the benefit of operating synergies following a merger for up to ten years. However, these merger synergies could yield less savings than anticipated should the OEB impose a higher efficiency target or greater earnings sharing mechanisms on the merged entity (MergeCo) during the ten-year rebasing deferral period. DBRS assumes that merger savings will be fully passed onto ratepayers after the ten-year rebasing deferral period. Furthermore, MergeCo will be exposed to integration and early rebasing risk. Where a rate application is required before ten years, synergetic benefits could be less than projected.

MergeCo’s financial risk assessment (FRA) is expected to be weaker than it otherwise would have been had PowerStream remained a standalone entity, during the first few years following the merger as a result of the following:

(1) Incremental debt associated with the HOBNI acquisition: The purchase price is expected to be approximately $607 million and funded with materially higher leverage at 70% (versus Ontario-based utilities’ deemed capital structure of 60% debt and 40% equity);
(2) A material acquisition premium ($202 million) to HOBNI’s rate base ($405 million): The acquisition premium will not be added on the rate base, and as such, there will be no recovery of the acquisition premium through rate increases; and
(3) Upfront merger costs whereas costs savings will be spread over the ten-year rebasing deferral period. DBRS will further review both MergeCo’s BRA and FRA when the OEB releases its decision on the Transaction.

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, 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.