ENMAX Corp. Downgraded To 'BBB-'; Off CreditWatch; Outlook Stable

  • On March 17, 2020, Calgary-based utility operator ENMAX Corp. (ENMAX) received all regulatory approvals to close the previously announced highly leveraged acquisition of Emera Inc.'s subsidiary Emera Maine.
  • We are lowering our issuer credit rating on ENMAX by one notch to 'BBB-' from 'BBB', reflecting an expected weakening of financial measures after closing the mostly debt-funded acquisition.
  • We are also lowering our ratings to 'BBB-' from 'BBB' on ENMAX's unsecured debt.
  • At the same time, we are removing all of our ratings on the company from CreditWatch, where we placed them with negative implications on Oct. 3, 2019.
  • The stable outlook incorporates our view that after acquiring Emera Maine, majority of ENMAX's operating cash flows will be from regulated transmission and distribution operations in Calgary, Alberta, and in Maine. The outlook also reflects our view that ENMAX will not pursue any further debt-funded transactions and focus on strengthening the balance sheet by repaying debt with internally generated cash flows.
TORONTO (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the above rating actions.
The downgrade follows ENMAX's aquisition of Emera Maine for an enterprise value of $1.8 billion including the assumption of $500 million of Emera Maine debt.  Although the purchase of Emera Maine's electric transmission and distribution assets have modestly improved the overall business risk, the highly leveraged nature of the transaction weakens the overall financial risk profile with an expected adjusted debt to EBITDA around 5.5x over the next few years. This deterioration in the financial measures more than offsets the slight improvement in the business risk profile.
The stable outlook on ENMAX reflects our expectation of stable financial measures for the consolidated company, consistency in the projected mix of utility and non-utility businesses, and steady regulatory support. Our baseline forecast for 2020 and 2021 includes adjusted debt to EBITDA of about 5.5x.
We could lower ratings on ENMAX over the next two years if its financial measures materially weaken such that adjusted debt to EBITDA is approaching 6x. This could occur if the company's ability to effectively manage regulatory risk weakens, gross margins from the non-utility generation business decline if the current low power prices persist, or it uses more debt to fund capital spending. In addition, we could lower ratings if business risk were to increase.
We could raise ratings on ENMAX over the next two years if financial measures improve, with adjusted debt to EBITDA approaching 4.5x absent any materially weakening of business risk. This could occur if ENMAX would delever the capital structure over the next two years with greater use of internally generated cash flow to repay debt.
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