Morningstar DBRS Confirms Enova Power Corp.'s Issuer Rating at "A" With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed its Issuer Rating on Enova Power Corp. (Enova or the Company) at "A" with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
Enova's credit rating is based on: (1) the Company's electricity distribution business under a supportive regulatory framework in Ontario, which provides a predictable source of earnings and cash flows; (2) Enova's reasonable financial risk assessment with strong credit metrics; and (3) support from Enova's municipal shareholders. There were no material changes to Enova's business risk profile in 2023 and there have not been any so far in 2024. Under the current regulatory regime, the Company is allowed to defer rebasing and retain operating synergies following the merger up to 10 years until 2033. The Stable trend reflects Morningstar DBRS' expectation that Enova's business risk and credit metrics will remain stable in the medium term.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action to be unlikely over the near to medium term based on the Company's key credit metrics and the current regulatory environment. Although it is unlikely, Morningstar DBRS could take a negative credit rating action should Enova's business risk profile or its credit metrics weaken significantly to a level that no longer supports the current credit rating category on a sustained basis (i.e., cash flow-to-debt below 12.5% and debt-to-capital above 65%).

EARNINGS OUTLOOK
Given its regulated operations, Enova's earnings have been relatively stable and predictable. The Company's earnings were solid throughout its first full year in 2023 because of an increase in customer count and volumes, and it continued its capital investment in the distribution system and integration activities after the merger. Morningstar DBRS expects the Company's earnings to remain steady through the current regulatory period, with a modest increase in earnings year over year under the reasonable annual rate adjustment mechanism.

FINANCIAL OUTLOOK
Enova's financial risk assessment remains supportive of the "A" credit rating. The Company's key credit metrics were strong and its liquidity remained solid in 2023, reflecting sizable credit facilities, stable and timely cash flow, and low debt. The capital expenditures (capex; net $48.4 million planned for 2024) will remain largely flat throughout the regulatory period, as the majority of Enova's capex in 2024 will focus on ongoing distribution projects and integration activities. Based on the Company's projected budget and its long-term leverage target, Morningstar DBRS expects Enova to continue to manage its capex and dividends in a prudent manner, maintaining leverage in line with the regulatory capital structure.

CREDIT RATING RATIONALE
Enova's credit rating is supported by the stability of its regulated business, strong support from its municipal shareholders, and the Company's reasonable financial profile. It is partly offset by the operational challenges and performance pressure under the price cap incentive rate-setting.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Enova, the BRA factors were considered in the order of importance contemplated in the methodology.

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

(C) Weighting of the BRA and the FRA
In the analysis of Enova, 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 of 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 Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

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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