DBRS Confirms ENMAX Corporation at A (low) and R-1 (low) with Stable Trends

DBRS Limited (DBRS) 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 confirmations are based on (1) the stability of ENMAX’s regulated electricity distribution and transmission business (Power Delivery, 58% of 2017 DBRS-adjusted 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 ratings, considering ENMAX’s mix of regulated and non-regulated businesses; and (3) continued financial support from its 100% owner, the City of Calgary (the City; rated AA (high)/R-1 (high) with Stable trends by DBRS), which provides the majority of the Company’s financing (68% of outstanding debt at December 31, 2017). These factors are partly offset by the continued pressure on ENMAX’s non-regulated business (Competitive Energy, 42% of 2017 DBRS-adjusted EBIT) mainly as a result of lower wholesale electricity margins amid ongoing price volatility in the Province of Alberta (the Province; rated AA/R-1 (high) with Negative trends by DBRS). The implementation of the Province’s recently introduced electricity market framework and policies, including the Alberta Climate Leadership Plan and a capacity pricing mechanism, is progressing. However, market uncertainty remains, especially with regards to whether there will be significant policy changes, or roll-back of some of these policies, when the current government’s mandate ends in 2019.

DBRS notes that in 2017, ENMAX adjusted its strategic direction to reduce its consolidated risk profile over time by focusing on regulated and contracted cash flows by optimizing its generation portfolio and growing its regulated and long-term contracted businesses. DBRS considers this new strategic direction and focus on secure stable cash flows to be supportive of the current ratings. Given ENMAX’s new strategic direction, DBRS expects that the majority of EBIT will continue to be generated by regulated operations going forward. With respect to regulatory uncertainty from the current Alberta Utilities Commission’s 2018–2020 Generic Cost of Capital proceeding to determine the allowed return on equity and deemed equity ratios for the ENMAX Power Delivery segment, DBRS expects a reasonable determination that has minimal impact on ENMAX’s credit profile.

Overall, in 2017, ENMAX’s consolidated cash flow and earnings declined significantly, mainly as a result of reduced electricity margins in the Competitive Energy Segment. Despite the weak 2017 performance, DBRS expects ENMAX’s key credit metrics to remain in line with the current ratings, as earnings and cash flows from the Competitive Energy segment are projected to partially recover in 2018 based on the Province’s modestly improving business outlook and recent electricity price increases. As a result of stronger electricity demand in 2017 (increase of 4% from 2016) and the improving electricity oversupply condition as a function of the retirement of major coal assets, coupled with the policy impact on coal generation pricing, wholesale electricity forward prices have increased significantly in the last few months. ENMAX’s highly integrated business model, whereby its retail operations act as a natural hedge for the generation business, should continue to provide some mitigation to the impact of volatile wholesale electricity prices. Combined with the ability to defer major capital project spending and the continued financial support from the City, DBRS expects ENMAX’s credit metrics to remain in line with the current ratings. However, should the Company’s key credit metrics deteriorate to a point where this is no longer the case, a negative rating action may occur. A positive rating action is considered unlikely over the medium term.

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), Rating Companies in the Independent Power Producer Industry (May 2017), DBRS Criteria: Guarantees and Other Forms of Support (January 2018), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 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.

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.