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), and the Commercial Paper rating at R-1 (low). All trends are Stable. The confirmation is based on (1) the stability of ENMAX’s regulated electricity distribution and transmission business (around 45% of 2016 EBIT), which operates under a reasonable regulatory regime and provides steady and predictable earnings and cash flows for the Company; (2) key credit metrics that have remained in line with the current rating category, considering a mix of the regulated and non-regulated businesses; and (3) continued financial support from its 100% owner, the City of Calgary (rated AA (high) with a Stable trend by DBRS), which provides the majority of the Company’s financing (70% of outstanding debt in 2016). This is partly offset by the continuing pressure on ENMAX’s non-regulated business as a result of ongoing weak wholesale electricity prices in the Province of Alberta (the Province).

ENMAX’s non-regulated business continued to be pressured in 2016. While earnings from the Competitive Energy segment were steady compared with 2015, following the return of the Battle River 5 and Keephills Power Purchase Agreements, earnings remained weak as a result of low power prices and weaker economic conditions in the Province. Earnings and cash flows from the Competitive Energy segment are expected to further weaken in 2017 as low electricity prices persist. However, DBRS expects ENMAX’s key credit metrics to remain in line with the current rating range, as the Company plans to defer capital expenditures, including for the Genesee 4 and 5 natural gas-fired combined cycle project, until (1) market prices recover and (2) there is more clarity with the uncertainties in the Alberta power market, including the Alberta Climate Leadership Plan and the introduction of capacity pricing. The Company’s highly integrated business model, where its retail operations act as a natural hedge for the generation business, should continue to provide some mitigation during this period of lower electricity prices from the oversupplied condition and weaker demand. The retail operations also benefit from long-term contracts with residential (up to five years) and institutional customers (ten to 20 years). Should ENMAX’s key credit metrics deteriorate to a point where it is no longer commensurate with the current ratings, negative rating action may occur.

ENMAX’s regulated business remained stable in 2016. In October 2016, the Alberta Utilities Commission (AUC) released its decision on the 2016–2017 Generic Cost of Capital proceeding for all Alberta-based rate-regulated transmission and distribution utilities. In its decision, the AUC set the allowed return on equity (ROE) at 8.30% for 2016 and a 20-basis point (bps) increase to 8.50% for 2017. The AUC also set the deemed equity for all but one utility in the Province at 37%, representing a 100 bps increase for ENMAX’s transmission business but a 300 bps decrease for the distribution business. DBRS views the decision as largely credit neutral for the Company, as the decrease in deemed equity for the distribution business should be offset by the higher equity thickness for the transmission business and the overall increase in the allowed ROE for 2017. Going forward, DBRS expects the earnings mix of regulated and non-regulated operations to each account for between 40% and 60%. Should earnings from the Competitive Energy segment exceed 60% as a result of significant investments into the segment (versus from improvement in the pricing environment), negative rating action may 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 principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), Rating Companies in the Independent Power Producer Industry (June 2016), DBRS Criteria: Guarantees and Other Forms of Support (February 2017), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com under Methodologies.