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

DBRS Limited (DBRS) confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares rating at Pfd-2 (low) with a Stable trend. The rating is based on the credit quality of Valener’s 29% ownership interest in Énergir, L.P. (the Partnership; previously Gaz Métro Limited Partnership), which guarantees the First Mortgage Bonds and Senior Secured Notes (each rated “A” with a Stable trend by DBRS) of Énergir Inc. (Énergir; previously Gaz Métro inc.). Valener’s preferred share rating is one-notch lower than the standard mapping from Énergir’s Issuer Rating of “A”, reflecting structural subordination of obligations at Valener relative to Énergir.

While Valener’s leverage metrics weakened moderately during the fiscal year ended September 30, 2017 (F2017), its cash flow-based coverage of interest expense strengthened moderately and overall performance remained supportive of the current rating. Valener’s cash flow (before changes in working capital items) consists primarily of distributions received from its 29% ownership in Énergir, L.P. and, to a lesser extent, distributions received from its minority interests in three wind farm projects. The Company’s debt level increased during F2017, as its $29 million investment in additional units of the Partnership (to maintain its 29% ownership interest) in May 2017 was funded mainly from borrowings under its credit facility. The increase in cash flow during F2017 was mainly a result of higher distributions received from Énergir, L.P. and the wind power assets.

DBRS recognizes that, as a 29% owner, Valener does not control the Partnership’s day-to-day operations, strategic planning or distribution policy. However, under the Gaz Métro Limited Partnership Agreement, Énergir, L.P. will distribute at least 85% of its net income (excluding non-recurring items) to the partners. Although there are certain exceptions under which distributions from the Partnership could be reduced below this threshold, mainly related to safeguarding Énergir, L.P.’s financial viability, DBRS believes that the probability of this event is very low given the Partnership’s strong credit profile and its long-term track record of generating strong and predictable cash flow available for distribution and paying distributions to its unit holders, including Valener.

DBRS defines Valener’s total debt-and-equivalents as at September 30, 2017, as consisting of $103.8 million drawn under its credit facility and $24.4 million (25%) of its preferred shares treated as debt-equivalents. On this basis, Valener’s total debt-and-equivalents -to-capital ratio was reasonable at approximately 15.3% at that date. DBRS expects Valener to fund future growth investments in a manner to maintain this ratio within the 20% threshold on a sustained basis in order to maintain the current rating. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-gross interest expense at 33.6 times (x), cash-flow fixed charge coverage at 9.9x and cash flow-to-total debt-and-equivalents at 45.9% in F2017.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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