DBRS Confirms Énergir Inc. at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating, First Mortgage Bonds (FMB) and the Senior Secured Notes (the Notes) ratings of Énergir Inc. (Énergir or the Company; previously, Gaz Métro inc.) at “A” and its Commercial Paper (CP) rating at R-1 (low). All trends are Stable. The ratings of Énergir are based on the credit quality of Énergir, L.P. (the Partnership; previously, Gaz Métro Limited Partnership), which guarantees the Company’s FMB, the Notes and a secured credit facility that supports the CP program. Énergir is the general partner of the Partnership and serves as its financing entity.

The Partnership’s key credit metrics remained steady in the last twelve months ending December 31, 2017 (LTM F2018). While the key credit metrics saw modest weakening in the quarter, they remain supportive of the current ratings. DBRS notes, as a result of the U.S. tax reform, reported net income decreased by $24.2 million, largely due to a downward remeasurement of deferred tax assets. DBRS has excluded this charge as it is one-time, non-recurring and non-cash expense. Excluding this charge, earnings and cash flows for LTM F2018 were largely in line with F2017 results. DBRS expects Énergir, L.P.’s financial risk profile to remain stable and the Partnership to continue funding any free cash flow deficits as a result of the capex program ($535 million to $560 million for F2018) prudently with a mix of debt and equity to maintain the current ratings.

Énergir, L.P.’s business risk profile continues to be underpinned by its portfolio of regulated utilities, which provides stable earnings and cash flows. The Partnership’s regulated natural gas distribution utility in Québec, Gaz Métro-QDA (approximately 66% of LTM F2018 EBITDA), is regulated by the Régie de l’énergie (the Régie). Regulation under the Régie remains supportive of the “A” rating, with Gaz Métro-QDA currently operating under a cost-of-service regime with a reasonable allowed return on equity (ROE) of 8.90% and deemed equity of 46% (including 7.5% of preferred shares). Regulation for the Partnership’s Vermont utilities (approximately 32% of LTM F2018 EBITDA), which include Green Mountain Power Corporation and Vermont Gas Systems, Inc., have also remained reasonable with allowed ROEs of 9.10% and 8.50%, respectively. DBRS notes that Énergir, L.P. has been pursuing opportunities in non-regulated segments, particularly in energy production, services and storage. For F2018, the Partnership intends to invest about $125 million to $150 million in solar projects at its wholly owned subsidiary, Standard Solar Inc., a vertically integrated power project contractor, operator, developer and owner. While earnings and cash flows from the non-regulated segment are typically more volatile because of the higher associated volume risk, DBRS notes these investments have remained relatively modest compared to capital expenditures for the Partnership’s regulated operations. Additionally, under the trust deed, Énergir, L.P.’s interest in non-regulated energy-related activities and non-energy-related activities must not exceed 10% of total non-consolidated assets (3.14% as at December 31, 2017) and non-energy-related activities may not exceed 5% of total non-consolidated assets (none as at December 31, 2017). As such, regulated operations will continue to represent the large majority of the Company’s activities.

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: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018); and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), 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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