DBRS Comments on Proposed Merger Involving PowerStream, Enersource and Horizon

DBRS Limited (DBRS) has today commented on the planned merger of PowerStream Holdings Inc. (PowerStream; PowerStream’s electricity distribution company, PowerStream Inc., is rated “A,” Under Review with Developing Implications by DBRS), Enersource Corporation (Enersource; rated “A”, Under Review with Developing Implications by DBRS) and Horizon Holdings Inc. (Horizon) and the subsequent purchase of Hydro One Brampton Networks Inc. (HOBNI; rated “A,” Stable trend, by DBRS; together, the Transaction). The Transaction remains on track to be completed in the first quarter of 2017. The new company will be called MergeCo until a name is chosen.

MergeCo intends to borrow funds at its holding company (HoldCo) and advance these funds to its operating subsidiaries. The outstanding senior unsecured debentures of PowerStream, Enersource and Horizon will be assigned to HoldCo.

The Transaction, as it currently stands, should support a business risk assessment of “A” for MergeCo, underpinned by a reasonable regulatory regime in Ontario. MergeCo is expected to benefit from operating efficiencies and cost savings as well as a bigger geographic footprint. Under the current regulatory regime, shareholders retain the benefit of operating synergies following a merger for up to ten years. The Transaction will result in the establishment of the largest municipally owned electricity-distribution company in Ontario in terms of customer count, with over 960,000 customers (versus Toronto Hydro Corporation (rated “A,” Stable trend, by DBRS) with approximately 740,000 customers).

Assuming that the Ontario Energy Board approves MergeCo’s Mergers, Acquisitions, Amalgamations, and Divestitures application without material changes from the initial submission filed in April 2016, MergeCo’s financial risk assessment will likely be A (low). Key financial metrics are expected to be weaker than they otherwise would have been had Enersource, PowerStream and Horizon remained stand-alone entities as a result of the following:

(1) Incremental debt associated with the acquisition of HOBNI: The purchase price is expected to be approximately $607 million and funded with materially higher leverage at 70% (versus Ontario-based utilities’ deemed capital structure of 60% debt and 40% equity);
(2) Material acquisition premium ($202 million) to HOBNI’s rate base ($405 million): The acquisition premium will not be added onto the rate base, and as such, there will be no recovery of the acquisition premium through rates; and
(3) Upfront merger costs: Cost savings will be spread over the ten-year rebasing deferral period.

Overall, MergeCo’s credit quality is expected to be “A” with limited financial flexibility, as overall key financial ratios are expected to be at the lower end of the “A” rating range.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2016), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.