Fitch Ratings has affirmed ENMAX Corporation's Long-Term Issuer Default Rating (IDR) and senior unsecured debt at 'BBB'.
The Rating Outlook is Stable.
ENMAX's ratings benefit from its regulated transmission and distribution (T&D) utility operations in the Canadian province of Alberta through Enmax Power Corporation (EPC/NR) and in Maine through Versant Power (NR). With a sizeable utilities-focused capital investment program, the regulated segment is expected to contribute 60%-70% of the EBITDA going forward. Fitch expects ENMAX's credit metrics to remain in line with the rating. The ratings are tempered by the higher risk, albeit conservatively managed, non-utility power supply and retail business in Alberta run by ENMAX Energy Corporation (EEC).
Fitch rates ENMAX based on its standalone credit profile with no direct notching uplift related to its ownership by the City of Calgary.
Key Rating Drivers
Low Risk Utility Operations: ENMAX's utilities in Alberta and Maine are relatively low-risk and stable operations that support a strong business risk profile. Ownership of two distinct utilities provides geographic and regulatory diversification.
Constructive Regulatory Environment at Alberta: Fitch views the regulatory construct under the Alberta Utilities Commission (AUC) as constructive. Through EPC, ENMAX operates the City of Calgary's electric T&D operations. Fitch expects EPC to account for approximately 40%-45% of the company's EBITDA over the forecast period. The transmission business operates under a cost-of-service model with multi-year rate plans and forward-looking test years. The distribution segment operates under a performance-based regulation (PBR) framework. PBRs in Alberta feature multi-year rate plans, revenue decoupling and annual tariff adjustments that track inflation net of projected productivity savings.
With the end of PBR-2 (2018-2022), Fitch believes that the distribution cost-of-service rates approved for the rebasing year of 2023 will smooth the company's transition to PBR-3. Fitch expects it to begin in 2024 with no material changes in the provisions. Fitch views the supportive regulations in Alberta and ENMAX's cost controls as sufficient offsets to the lower ROEs (8.5%) and higher leverage (37% equity capitalization) in the province as compared to the U.S.
Versant's Mixed Regulatory Environment: Fitch expects ENMAX's U.S. subsidiary, Versant, to account for approximately 20%-25% of the company's EBITDA over the forecast period. Versant's regulatory environment is split roughly 50:50 between the U.S. Federal Energy Regulatory Commission (FERC) and the Maine Public Utilities Commission (MPUC). The transmission business operates under FERC, which Fitch considers to be one of the most supportive regulators due to formula rates, robust capital structures, and timely investment recoveries.
Versant's distribution segment is regulated by the MPUC, which Fitch views as restrictive with authorized ROEs and equity capitalizations that are often lower than the U.S. average. Versant Power filed a rate case in October 2022 requesting an increase of $33.1 million with an ROE of 9.35% and an equity ratio of 49%. Fitch assumes a constructive rate case decision will be reached.
Maine has an initiative on the ballot for November 2023, which, if approved, would create create a municipal electric T&D utility and direct it to acquire all of the investor-owned T&D utilities in the state, including Versant. Municipalization efforts typically do not succeed given the high cost to acquire the assets (usually fair market value) and the time consuming, complex, and often litigious process, especially if done by eminent domain. Based on these precedents, Fitch does not expect Versant's ownership to change.
Conservative Competitive Energy Business: EEC operates ENMAX's relatively high-risk power generation and competitive retail business in Alberta. However, Fitch believes that the segment is conservatively managed by active commodity hedging and by matching generation with fixed price retail contracts locking in margins five years out. EEC is the largest electricity retailer in Alberta and maintains a predominantly gas fired and efficient 1,522MW generation fleet. Fitch expects this segment to contribute 30%-40% of the company's EBITDA through 2025.
Increased Capex: ENMAX's forecasted capex is $1.9 billion through 2023-2025 with a peak in 2023 around 28% higher than the previously projected. Almost 90% of the capex is planned at the utilities, focusing on aging infrastructure and grid modernization, and will aid the growth of ENMAX's regulated earnings base. Fitch believes that the investment risk is mitigated significantly given the sound recovery mechanisms in place at the utilities.
Sound Financial Metrics: FFO Leverage was lower than estimated at 4.7x in 2022 due to better hedged spreads at EEC in a high fuel price environment. Leverage is expected to see moderate pressure from increased capex, opex and normalization of EEC earnings in 2023. However, Fitch, estimates that leverage will improve going forward to 5x through 2025 helped by the expected rate case resolutions at EPC and Versant Power, and increased fixed price retail contracts and cost efficiencies at EEC.
Shareholder Relationship: ENMAX is a private corporation with its sole shareholder being the City of Calgary. As such, Fitch deems ENMAX to be a Government-Related Entity (GRE). The City of Calgary elects ENMAX's board of directors based upon recommendations from the ENMAX board, which is comprised of independent directors plus the President & CEO.
Through its election of directors, the City of Calgary exercises legal control over the company. However, after an initial investment in 1998, the City of Calgary has not provided any financial support to ENMAX, leading to Fitch's assessment of a moderate strength of linkage. While Fitch views the socio-political implications of an ENMAX default on the shareholder as moderate, ENMAX's small relative contribution to Calgary's overall operating budget and a lack of guarantees flowing from the City of Calgary to ENMAX's debt causes Fitch to deem the incentives to provide support as weak.
Due to these support considerations, Fitch rates ENMAX based on its standalone credit profile with no direct notching uplift related to the City of Calgary ownership. However, ENMAX accesses the provincial Loans to Local Authorities (LTLA) program through the City of Calgary, thereby securing a lower cost of debt for the Alberta T&D utility.
Derivation Summary
ENMAX's closest peers are fellow parent holding companies Algonquin Power & Utilities Corp. (APUC; BBB/Stable) and AVANGRID, Inc. (BBB+/Stable). Fitch expects ENMAX's proportion of consolidated EBITDA from regulated utility operations to remain in the 60%-70% range, lower than APUC (75%) and AVANGRID (about 80% post-merger with PNM Resources Inc. expected in 2023). APUC and AVANGRID are likely to have elevated near-term leverage due to acquisitions/growth spending. Avangrid's leverage is expected to peak in 2023-2024 before reaching around 5.3x in 2025 while APUC's leverage is expected to breach its negative sensitivity threshold in 2023 and then improve to around 5.5x in 2024. ENMAX's leverage is expected to remain comparable averaging 5.4x through 2025.
Fitch views the regulatory environment in Alberta (for ENMAX's utility operations, which are expected to account for around 40%-45% of the company's total EBITDA) as constructive. Fitch views the regulatory environment in Maine (around 20%-25% of the forecasted EBITDA) as restrictive. AVANGRID also operates in Maine, in addition to other Northeast states with regulatory environments that have grown weaker, in Fitch's opinion. However, Avangrid's rating receives an uplift from the linkage with its ultimate corporate parent Iberdrola (BBB+/Stable). APUC's largest regulatory jurisdiction is Missouri, which historically has had a somewhat challenging regulatory environment, although it has become more balanced in recent years. APUC benefits from a diversified asset mix with operations in a dozen states in the U.S. and ownership of gas, electric and water utilities.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Continuation of multi-year PBR framework for EPC distribution rates;
EPC transmission utility rate filing approval for 2023 to 2025 consistent with prior rate decisions;
Versant current distribution rate case approved with effect from August-2023 and another approval in January 2025 consistent with prior rate decisions;
Spark Spreads and Alberta wholesale electricity prices consistent with currently hedged positions and forward market curves. Natural gas prices consistent with currently hedged positions as well as the Fitch price deck indicating prices coming off their 2022 high;
Consolidated ENMAX capex of $1.9 billion through 2025, weighted 85%-90% towards ENMAX's regulated utility franchises;
Shareholder dividends consistent with the current payout policy in place including the greater of 30% of prior year comparable net earnings, or $30 million;
Interest rates remain elevated in 2023 and moderate slightly in 2024 and then remain stable in 2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
While an upgrade is unlikely on the current business mix, FFO leverage below 4.8x with regulated utility EBITDA forming over 85% of the total on a sustained basis could warrant positive rating actions.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO leverage expected to exceed 5.8x on a sustained basis;
Debt financed acquisition or acquisitions with no clear path to deleveraging over the forecast period;
Further expansion into unregulated businesses leading to less than 60% EBITDA contribution on a sustained basis from regulated operations;
Lengthy unplanned downtime at the company's generating assets, leading to an imbalance between produced and hedged electricity versus fixed-price contract demand or generation plant outages during an extremely high demand period, forcing ENMAX to buy electricity at very high prices to meet fixed-price demand;
Adverse regulatory outcomes.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Fitch considers the liquidity for ENMAX to be adequate. Liquidity is primarily supported by the company's $1,000 million committed unsecured revolving credit facility (RCF), maturing in 2026, which backstops a $300 million commercial paper (CP) program. The RCF is also available for direct draws, banker's acceptances and letters of credit. Additionally, ENMAX has a recently expanded $1,250 million uncommitted credit facility (LC Facility), with LCs of $790 million issued at Dec. 31, 2022.
At Dec. 31, 2022, the company had $99 million of CP issued, $205 million drawn on its $1,000 million RCF. Including a Dec. 31, 2022 cash balance of $48 million and excluding availability under the company's LC Facilities (as those facilities are uncommitted), total ENMAX liquidity was approximately $744 million.
ENMAX's near-term debt maturities are manageable with around $200 million in unsecured private debentures due in 2024 and $300 million in 2025. These are in addition to roughly $85 million in annual loan amortization on the company's LTLA program. Fitch expects ENMAX to have continued access to capital markets to refinance the private debt as it comes due and expects the company to manage its LTLA repayments and issuance in accordance with the regulated capital structure at EPC. ENMAX's debt is primarily fixed rate, which mitigates the risks associated with the current high interest rate environment.
Versant Power has an USD 80 million committed RCF available for its liquidity. This RCF matures in 2026 and had only USD 3m of LCs drawn as at Dec. 31, 2022. Versant Power has no long-term debt maturing in the next five years.
Issuer Profile
ENMAX is an Alberta-based company providing electric utility service in Alberta, Canada and Maine, U.S., in addition to a competitive Alberta-based power supply and retail marketing business. The company is a wholly owned subsidiary of the City of Calgary.
Summary of Financial Adjustments
No financial statement adjustments were made that were material to the rating rationale outlined above.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
VERSANT POWER 
