DBRS Confirms Valener Inc. at Pfd-2 (low), Stable Trend

DBRS Limited (DBRS) has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. Valener’s rating is based on the credit quality of Gaz Métro Limited Partnership (GMLP or the Partnership), which guarantees Gaz Métro inc.’s First Mortgage Bonds and Senior Secured Notes (both rated “A” with a Stable trend by DBRS). The one-notch differential in the ratings of Valener and the Partnership reflects the structural subordination at Valener.

For the nine months ended June 30, 2016 (9M 2016), Valener’s operating cash flow continued to support its common and preferred share cash dividend payments ($26.8 million and $3.3 million, respectively). The Company’s operating cash flow primarily consists of distributions from its 29% ownership in the Partnership and, to a lesser extent, distributions from its financial interest in wind farm projects. Distributions received from GMLP and the wind assets combined improved modestly to approximately $43.3 million in 9M 2016 from $41.7 million in 9M 2015, driven by higher distributions received from GMLP, which more than offset a decrease in distributions received from wind assets mainly because the first distributions were paid during the fiscal year ended September 30, 2015 (F2015), and included those related to operations in F2015 and F2014.

Although distributions from GMLP could be curtailed if the viability of the Partnership were to need safeguarding, GMLP has historically provided stable distributions to its equityholders. GMLP has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for much of the last 20 years.

As the Company has no bonds/debentures issued and is not expected to issue any long-term debt in the foreseeable future, its leverage solely consists of its outstanding credit facility. As at June 30, 2016, Valener utilized approximately $93 million of the $200 million credit facility that matures on March 2, 2021. Valener’s debt-to-capital ratio was reasonable at approximately 11.2% as at June 30, 2016. Valener is expected to fund future growth investments in a prudent manner to maintain leverage within the 20% DBRS threshold. If Valener is unable to do so on a sustained basis, this could result in a negative rating action. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-interest at 31.3 times, cash-flow fixed coverage at 9.8 times and cash flow-to-debt at 64.7% for the 12 months ended June 30, 2016.

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 Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016) and DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), which can be found on our website under Methodologies.