DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Unsecured Debentures rating of ENMAX Corporation (ENMAX or the Company) to BBB (high) from A (low). DBRS Morningstar also downgraded ENMAX’s Commercial Paper rating to R-2 (high) from R-1 (low). All trends are Stable. This action follows the closing of the acquisition of Emera Maine, the regulated electric transmission and distribution company previously owned by Emera Incorporated, for a purchase price of USD 959 million ($1,286 million; the Acquisition). Including assumed debt, aggregate enterprise value is approximately USD 1.3 billion. This action removes the ratings from Under Review with Negative Implications, where they were placed on March 25, 2019, following the Acquisition announcement.
The downgrades reflect DBRS Morningstar’s view that the significant increase in leverage as a result of the mostly debt-financed acquisition more than offsets the modest improvement in ENMAX’s business risk profile resulting from the acquisition of relatively low-risk, regulated operations. The Stable trend reflects DBRS Morningstar’s expectation of modest deleveraging of ENMAX’s balance sheet and improvement in credit metrics over the next two to three years in order to support the current ratings.
Emera Maine serves 159,000 customers in northern Maine. Its USD 0.7 billion rate base is roughly split 60% transmission (federally regulated) and 40% distribution (state regulated) operations, both under cost-of-service (COS) methodologies with equity thicknesses and allowed returns on equity superior to ENMAX’s regulated operations in the Province of Alberta (Alberta or the Province; rated AA (low) with a Negative trend by DBRS Morningstar). However, rate cases for Emera Maine’s distribution operations are based on historical test periods, which increases lag in operating and capital cost recovery. DBRS Morningstar notes that as part of the Acquisition, Emera Maine will not request for an increase in distribution rates that would become effective prior to October 1, 2021.
With respect to ENMAX’s business risk profile, DBRS Morningstar 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. ENMAX estimates the Acquisition will result in a 50% increase in regulated rate base assets and increase the proportion of the Company’s EBITDA that is derived from stable regulated and non-commodity sources to 70% from 55%. DBRS Morningstar considers the business risk profile of Emera Maine to be generally in line with the previous A (low) rating of ENMAX.
With respect to ENMAX’s financial risk profile, DBRS Morningstar notes that ENMAX had $2.9 billion of total debt (including $850 million issued in support of the Acquisition) as at December 31, 2019 and generated operating cash flow of $0.4 billion (with no contribution from Emera Maine) for 2019. DBRS Morningstar estimates that, pro forma the remaining debt financing required to close the Acquisition ($0.25 billion), assumption of $0.5 billion of Emera Maine debt, and addition of $0.1 billion of Emera Maine cash flow (DBRS Morningstar estimate), the DBRS Morningstar-adjusted cash flow-to-debt metric would weaken to about 12.3%. This represents a significant increase in leverage from pre-Acquisition levels (20.4% at March 31, 2019) and, considering ENMAX’s mix of regulated and non-regulated businesses, is no longer consistent with the previous ratings. DBRS Morningstar also notes that debtholders at ENMAX are in a structurally subordinated position with respect to debtholders at Emera Maine, although the latter represents less than 20% of pro forma total consolidated debt and is self-supporting. ENMAX intends to use free cash flow to maximize deleveraging over the two to three years following closing of the Acquisition.
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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 Morningstar Criteria: Guarantees and Other Forms of Support; DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships; and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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