DBRS Places ENMAX Corporation Under Review with Negative Implications

DBRS Limited (DBRS) placed ENMAX Corporation’s (ENMAX or the Company) Issuer Rating of A (low), Unsecured Debentures rating of A (low) and Commercial Paper rating of R-1 (low) Under Review with Negative Implications.

This rating action follows the announcement that ENMAX has entered into a definitive agreement to acquire Emera Maine, the regulated electric transmission and distribution company currently owned by Emera Inc., for a purchase price of USD 959 million ($1,286 million; the Acquisition). Including assumed debt, the aggregate enterprise value is forecasted to be approximately USD 1.3 billion ($1.8 billion) on closing. The Company is funding the Acquisition entirely with debt. Subject to certain conditions and regulatory approvals, the Acquisition is expected to close late in 2019.

Emera Maine is headquartered in Bangor, Maine, and serves 159,000 customers in the northern part of the state. Its USD 0.7 billion rate base is roughly equally split between transmission (federally regulated) and distribution (state regulated) operations. Both operations are regulated under cost-of-service with equity thicknesses and allowed returns on equity that are superior to equivalent metrics for ENMAX’s Alberta-regulated operations. DBRS notes, however, that rate cases for Emera Maine’s distribution operations are based on historical test periods, which increases lag in operating and capital cost recovery.

IMPACT ON BUSINESS RISK PROFILE
DBRS notes that the Acquisition is consistent with ENMAX’s 2017 change in strategic direction to reduce its consolidated risk profile over time by focusing on regulated and contracted cash flows, including by growing its regulated and long-term contracted businesses. ENMAX estimates that the Acquisition will result in a 50% increase in regulated rate base assets and will increase the proportion of the Company’s cash flow that is derived from stable regulated and non-commodity sources to 70% from approximately 55% currently. Based on a preliminary evaluation of the regulatory regime for Emera Maine, from a business risk perspective, DBRS considers the Acquisition to be generally in line with the current ratings.

IMPACT ON FINANCIAL RISK PROFILE
DBRS notes that ENMAX had approximately $1.7 billion of total debt on its balance sheet as at December 31, 2018, and generated cash flow from operations of approximately $0.4 billion for the year, resulting in a DBRS-adjusted cash flow-to-debt metric of around 21%. Pro forma, DBRS estimates that the addition of approximately $1.3 billion of Acquisition debt, the assumption of approximately $0.5 billion of Emera Maine debt and the addition of DBRS-estimated $0.1 billion of Emera Maine cash flow from operations would weaken the DBRS-adjusted cash flow-to-debt metric to around 13%. This represents a significant increase in leverage for the Company and, considering ENMAX’s mix of regulated and non-regulated businesses, may no longer be in line with the current rating category. DBRS also notes that debtholders at ENMAX would be in a structurally subordinated position with respect to debtholders at Emera Maine, although the latter would represent only around 15% of pro forma total consolidated debt.

In the coming weeks, DBRS expects to review management’s detailed financing and strategic plans with respect to the Acquisition in order to provide further clarity on the path of ENMAX’s ratings. DBRS plans to resolve the Under Review rating action upon closing of the Acquisition.

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, Rating Companies in the Independent Power Producer Industry, DBRS Criteria: Guarantees and Other Forms of Support, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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