Morningstar DBRS Confirms Ratings of Énergir at "A" and R-1 (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the First Mortgage Bonds (the FMBs) rating of Énergir, L.P. (the Partnership) at "A" and the Commercial Paper rating at R-1 (low). Morningstar DBRS also confirmed the Issuer Rating, FMBs, and Senior Secured Notes (the Notes) ratings of Énergir Inc. at "A." All trends are Stable. Debt at Énergir Inc. (the FMBs and Notes) is guaranteed by Énergir, L.P. and ranks pari passu with the FMBs at the Partnership.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings of Énergir, L.P. are based on its regulated natural gas distribution operations in the Province of Québec (Québec or the Province; rated AA (low) with a Stable trend by Morningstar DBRS) and the State of Vermont (Vermont), and regulated electricity generation, transmission, and distribution operations in Vermont.

There were no material changes to the Partnership's regulatory framework or operations in the fiscal year ending September 30, 2023 (F2023), or so far in F2024. Morningstar DBRS continues to view regulation under the Régie de l'énergie (the Régie) in Québec and the Vermont Public Utility Commission as reasonable for the current ratings. Énergir, L.P. has continued its strategic plan to help decarbonize the economy, such as focusing on renewable natural gas. Morningstar DBRS remains encouraged by the joint offering with Hydro-Québec, under which the Partnership will be compensated over a 15-year period for revenue shortfalls from certain new buildings and existing customers who convert to using dual energy (e.g., using natural gas and electricity for space and water heating). In May 2023, the Régie additionally approved an application for dual energy offering for commercial and institutional customers. As such, Morningstar DBRS expects Énergir, L.P.'s earnings and cash flows to remain predictable over the medium term.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action is unlikely given the regulatory environments and the current key credit metrics. Morningstar DBRS could consider a negative credit rating action if the metrics weakened to a level no longer commensurate with the "A" rating category (i.e., cash flow-to-debt below 12.5%).

EARNINGS OUTLOOK
Earnings for the Partnership has been stable, supported by its low-risk regulated utilities and pipelines under long-term contracts. Morningstar DBRS notes that earnings for Énergir-QDA are also predictable because of the revenue decoupling mechanism in place, with any overearnings or shortfalls in revenues to be returned or collected from customers and reducing volatility from weather. For F2024, Morningstar DBRS expects earnings to increase moderately, tracking growth in the rate base and a higher approved rate of return for the Vermont utilities.

FINANCIAL OUTLOOK
Similarly, Énergir, L.P.'s key credit metrics have also remained steady and supportive of the "A" rating. Morningstar DBRS notes, under the Partnership Agreement, Énergir, L.P. will not distribute any less than 85% of its net income before nonrecurring items to its partners, except under extraordinary circumstances. The Partnership manages its capital expenditures through a prudent mix of debt and equity injections in order to maintain nonconsolidated leverage in line with the regulatory capital structure of 46% (including 7.50% of preferred shares; 54.9% debt as at September 30, 2023). Morningstar DBRS expects Énergir, L.P.'s key credit metrics to remain steady in F2023.

Morningstar DBRS additionally notes, under the Partnership's trust deed, nonregulated energy activities and nonregulated activities cannot, respectively, exceed 10% and 5% of total assets (2.39% and none as at September 30, 2023), which has led to very stable earnings and cash flows. As such, barring an acquisition, Morningstar DBRS expects Énergir, L.P.'s business and financial risk assessments to remain steady.

CREDIT RATING RATIONALE
The ratings of the Partnership are supported by the reasonable regulatory frameworks, cash flow diversification, and reasonable financial profile. This is partly offset by the exposure to industrial customers who are more sensitive to economic conditions and risk associated with inaccurate cost projection.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of the Partnership, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Partnership, the BRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of the Partnership, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (April 15, 2024), https://dbrs.morningstar.com/research/431184.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186/, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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