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), which guarantees the First Mortgage Bonds and Senior Secured Notes (each rated “A” with a Stable trend by DBRS) of Énergir Inc. (Énergir). Valener’s preferred shares 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.

On March 27, 2019, Valener announced that Noverco Inc. (Noverco), the controlling partner and indirect 71% owner of the Partnership, entered into a definitive arrangement agreement under which Noverco would indirectly acquire all issued and outstanding common shares as well as the Cumulative Rate Reset Preferred Shares of Valener (the Arrangement). Based on its preliminary review, DBRS notes that the Company’s Cumulative Rate Reset Preferred Shares rating would be discontinued upon repayment (see the DBRS press release, “DBRS Comments on Proposed Acquisition of Valener Inc. by Noverco Inc.,” dated March 28, 2019, for more details).

Valener’s leverage metrics improved moderately as at December 31, 2018, compared with September 30, 2017, levels while its cash flow-based coverage of interest expense (and of preferred share dividends) declined slightly. The Company’s 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 has declined since September 30, 2017, as its investing activities have been minimal. The increase in cash flow was mainly a result of higher distributions received from the Partnership 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 Énergir 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 unitholders, including Valener.

DBRS defines Valener’s total debt and equivalents as at December 31, 2018, as consisting of $84.5 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 12.9%. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-gross interest expense at 26.9 times (x), cash-flow fixed-charge coverage at 9.4x and cash flow-to-total debt and equivalents at 59.3% in the 12 months ending December 31, 2018.

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, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, 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.

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.

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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