DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, the First Mortgage Bonds (FMB) rating, and the Senior Secured Notes (the Notes) rating of Énergir Inc. (Énergir or the Company) at "A". DBRS Morningstar also confirmed the Company’s Commercial Paper (CP) rating at R-1 (low). All trends remain Stable. The ratings of Énergir are based on the credit quality of Énergir, L.P. (the Partnership), which guarantees the Company's FMBs, the Notes, and a secured credit facility that supports the CP program. Énergir is the general partner of the Partnership and serves as its financing entity.
The Partnership's business risk assessment is supported by its portfolio of regulated utilities, which provides a steady stream of earnings and cash flow. Énergir-QDA, the Partnership's regulated natural gas distribution utility in the Province of Québec (Québec; rated AA (low) with a Stable trend by DBRS Morningstar), provided 69.6% of EBITDA in F2019. In November 2019, the Régie de l’énergie (the Régie) issued its decision on Phase 2 of Énergir-QDA's F2020 rate case, which included transitioning from cost-of-service to a three-year ratemaking framework with an indexation formula for operating expenses for F2021 and F2022. The Régie also approved a revenue decoupling mechanism with variances between approved and actual revenues to be recovered or returned to customers. DBRS Morningstar notes that though Énergir-QDA will face greater cost pressure going forward as it will have to maintain operating costs within inflation, this is offset by the increased stability in revenues with the decoupling mechanism reducing volume risk.
The Partnership's financial risk assessment remained reasonable for the last 12 months ended December 31, 2019 (LTM 2020). Although earnings for LTM 2020 weakened, key credit metrics remained supportive of the current rating category. DBRS Morningstar expects earnings for F2020 to remain relatively stable, although the current Coronavirus Disease (COVID-19) pandemic may have a modestly negative impact for F2020. While earnings for Énergir-QDA should remain in line with expectations because of (1) the revenue decoupling mechanism, (2) long-term contracts with industrial customers, and (3) the majority of revenues for F2020 has already been collected in Q1 and Q2, earnings from the Vermont utilities will likely be modestly weaker because of lower demand. DBRS Morningstar expects the Partnership to continue to fund free cash flow deficits from the large capital expenditures program to expand and renew the network in Québec and investments by its subsidiaries in renewable projects, through a prudent mix of debt and equity in order to maintain metrics in line with the current ratings. Additionally, while investments in non-regulated activities have increased over the past few years, the Partnership’s trust deed restricts interest in non-regulated energy-related activities and non-energy-related activities to 10% of total non-consolidated assets (8.12% in F2019 from 4.78% in F2017) and thus will remain a modest segment for the Partnership. DBRS Morningstar considers a positive rating action for Énergir to be unlikely given the regulatory environments and the current key credit metrics of the Partnership. A negative rating action could occur if the metrics weakened to a level no longer commensurate with the "A" rating category.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
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 (September 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had/did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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