Morningstar DBRS Confirms Ratings on ENMAX Corporation at BBB (high) and R-2 (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed ENMAX Corporation's (ENMAX or the Company) Issuer Rating and Unsecured Debentures rating at BBB (high), as well as ENMAX's Commercial Paper rating at R-2 (high). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
ENMAX's ratings are supported by the Company's regulated electricity distribution and transmission operations around the City of Calgary (Calgary or the City, 100% owner of ENMAX; rated AA (high) with a Stable trend by Morningstar DBRS) and in the State of Maine (Maine), offset by the higher-risk competitive energy segment. The Stable trends reflect the Company's key credit metrics, which, considering the mix of the regulated and nonrate regulated businesses, are in line with the current ratings. Morningstar DBRS expects ENMAX's regulated business to contribute around 70% of consolidated EBITDA on a long-term basis, with the remainder coming from the competitive energy segment. In 2023, the competitive energy segment contributed 45% of consolidated EBITDA as earnings benefitted from the continued higher wholesale prices and wider spark spreads. However, ENMAX remains committed to its strategy of focusing on its regulated businesses with the Company forecasting that around 90% of its capital expenditures (capex) in the next three years will be for regulated operations, with mainly maintenance capex planned for the competitive energy segment.

In November 2023, the Alberta Utilities Commission (AUC) approved a final return on equity (ROE) of 9.28% for the Alberta utilities effective January 1, 2024. The AUC also adopted a new formulaic approach for determining the ROE. Morningstar DBRS considers this development to be modestly positive for ENMAX as (1) the higher ROE should lead to higher earnings for 2024, (2) a formulaic approach should reduce the regulatory lag with generic cost-of-capital proceedings, and (3) the regulatory process is now more transparent and based on empirical data. In March 2024, Versant Power also filed an application with the Maine Public Utilities Commission for a 24.8% increase in distribution rates effective April 2025. If approved, the increase should help increase the Company's earnings and cash flows.

CREDIT RATING DRIVERS
Morningstar DBRS may consider a positive rating action if ENMAX's financial risk assessment (FRA) remains strong on a sustained basis (i.e., metrics in the high BBB range for the Independent Power Producer (IPP) FRA and at or above the "A" range for the Regulated Utility FRA), even during periods of normalized earnings from the competitive energy business. A negative rating action may occur should ENMAX revise its strategy and grow its nonrate regulated operations, which permanently shifts its business risk, or the metrics weaken to a level no longer supportive of the current ratings, such as if the metrics fall into the BB range for the IPP FRA, and into the mid or lower end of the BBB range for the Regulated Utility FRA.

EARNINGS OUTLOOK
ENMAX's earnings are expected to remain predictable. Morningstar DBRS expects that around 70% of earnings on a long-term basis will be from regulated operations in Calgary and Maine. Earnings from the regulated operations are expected to see modest increases year over year, in line with growth in the rate base. Morningstar DBRS expects variability in earnings will mostly relate to the nonrate regulated business, where generation is partly exposed to volatile wholesale electricity prices. For 2024, Morningstar DBRS expects ENMAX Power's earnings to benefit from a higher approved ROE. Earnings from ENMAX Energy are expected to remain elevated in 2024 and 2025 as the Company continues to benefit from hedges entered into during periods of higher pricing in 2022 and 2023. Morningstar DBRS expects earnings from this segment to begin to normalize in 2026.

FINANCIAL OUTLOOK
ENMAX's key credit metrics have, considering the mix of regulated and nonrate regulated operations, been supportive of the BBB rating range. The Company's debt-to-capital and EBIT-interest coverage ratios were weaker in 2023 because of higher debt for the period. However, Morningstar DBRS expects key metrics to improve moderately in 2024. ENMAX has noted it intends to deleverage over time to improve its credit metrics. While ENMAX's overall debt load is expected to grow in line with the rate base, Morningstar DBRS expects the Company to manage its capex (around $700 million for 2024) and dividends (greater of 30% of the previous year's reported comparable net earnings or $30 million) so it can continue to pay down debt issued as part of the Maine utility acquisition completed in 2020.

CREDIT RATING RATIONALE
ENMAX's ratings are supported by its low-risk regulated electricity operations in Alberta and Maine, integration of electricity generation with retail customer base, and financial support from the City. This is partly offset by regulatory risks in Alberta and Maine, exposure to wholesale electricity price volatility, and weaker financial risk assessments following the Versant Power acquisition.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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) at https://dbrs.morningstar.com/research/427030.

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

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

(C) Weighting of the BRA and the FRA
In the analysis of ENMAX, 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 (June 27, 2024) https://dbrs.morningstar.com/research/435127.

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 following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186 and
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

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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