TEXT-S&P revises Entegrus Inc outlook to stable from negative

Fri Nov 30, 2012 11:07am EST

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Overview
     -- We are revising our outlook on ENTEGRUS Inc. to stable from negative. 
     -- We are also affirming our 'A' long-term corporate credit rating on the 
company.
     -- The outlook revision reflects our expectation that ENTEGRUS will not 
be acquiring transmission assets as the company had previously indicated. 
     -- As a result, our business risk and financial risk profiles are 
unchanged, at excellent and intermediate, respectively.

Rating Action
On Nov. 30, 2012, Standard & Poor's Ratings Services revised its outlook on 
ENTEGRUS Inc. to stable from negative. At the same time, Standard & Poor's 
affirmed its 'A' long term corporate credit rating on ENTEGRUS. 

The outlook revision reflects our expectation that the company will not 
acquire transmission assets, as it had previously indicated. ENTEGRUS had 
planned to acquire transmission assets that could have increased fixed assets 
50%, potentially all debt-financed. This could have materially weakened the 
company's business risk and financial risk profiles.  

Rationale
The rating on ENTEGRUS (formerly Chatham Kent Energy Inc.) reflects what 
Standard & Poor's views as the company's excellent business risk profile, 
which its stable, regulated cash flows and low-risk monopoly electricity 
distribution business support. We believe a small scale, exposure to a 
relatively weak regional economy, and its intermediate financial risk profile 
offset its credit strengths. 

ENTEGRUS is a holding company with more than 90% of its consolidated funds 
from operations coming from regulated local electricity distribution (LDC) 
businesses through its key subsidiary, Entegrus Powerlines Inc. The LDC serves 
about 40,000 customers (largely residential) within the Municipality of 
Chatham-Kent (A/Stable/--) and Middlesex County (not rated). As of June 30, 
2012, the company had C$23.5 million of long-term reported debt outstanding, 
which it owes to the municipality (its 90% owner) with no set maturity date. 
Corix Energy Inc. (not rated), a water utility infrastructure company in 
British Columbia, owns the other 10%.

Despite the municipality's ownership, we base our rating on the company's 
stand-alone credit risk profile of 'a' and our opinion that there is a 
"moderate" likelihood that Chatham-Kent would provide timely and sufficient 
extraordinary support in the event of financial distress.

The Ontario Energy Board's (OEB) regulatory framework supports the LDC's cash 
flow stability, in our view. The framework allows for the recovery of prudent 
costs and the opportunity to earn a modest return, and limits the LDC's 
exposure to commodity risk. Although ENTEGRUS must bill electricity customers 
for the commodity delivered, the cost is a flow-through. It has no obligation 
to ensure an adequate supply of electricity and is not burdened with the 
procurement process or power purchase agreements (PPAs). Net distribution 
revenues are subject to modest volumetric risk due to weather. In Standard & 
Poor's opinion, the LDC's monopoly position and the asset-intensive nature of 
electricity distribution limit competitive risk. We believe the OEB has 
exhibited increased scrutiny of requested cost increases in the distribution 
sector and the associated rate pressure (largely associated with commodity 
costs) on customers. Although we expect tempering rate increases will remain 
an important consideration, we believe the regulatory compact remains 
consistent in the province and that the OEB will continue to honor its mandate 
to balance customer needs and the utilities' ability to earn a modest return. 
That there have been no material cost disallowances in the sector and that 
distribution costs typically represent 15%-30% of the total energy bill 
support this view.

We view ENTEGRUS' small scale and exposure to the auto industry as a credit 
weakness, but not to the level that it will jeopardize the excellent overall 
business risk profile. Specifically, we believe that its small scale could 
limit its ability to access the capital market, as well as its resources to 
manage regulatory relationship and to implement its significant growth 
aspiration. We believe that the company's good customer profile, modest 
customer concentration risk, and regulatory support largely mitigate its 
exposure to the weak regional economy.

Standard & Poor's considers ENTEGRUS' financial risk profile as intermediate, 
with moderately lower financial leverage compared with that of its Ontario LDC 
peers. Standard & Poor's adjusted funds from operations (FFO) interest 
coverage and adjusted FFO-to-total debt are forecast to be about at 5.8x and 
at 27%, respectively, in 2012. 

Liquidity
In accordance with our criteria, we consider ENTEGRUS' liquidity adequate. Our 
assessment reflects the following factors and assumptions:
     -- The company's liquidity sources will exceed its uses 1.2x or more in 
the next 12 months. 
     -- We expect net sources remain positive, even in the event of a highly 
unlikely EBITDA decline of more than 15%.
     -- Liquidity sources include Standard & Poor's estimated annual FFO of 
about C$8 million and its cash on hand of C$6.6 million as of June 30, 2012. 
As per our criteria, liquidity sources do not include a fully available C$20 
million uncommitted credit facility, which it shares with the municipality. 

Liquidity uses include the nondeferrable capital expenditures in the 
distribution business. We do not include the dividend payments because we 
believe that the company will have flexibility on its dividend payments if it 
is under a highly unexpected financial stress scenario. We have not included 
the C$23.5 million note payable to Chatham-Kent as a use of funds in our 
calculation because we do not believe the municipality would demand debt 
repayment in a manner that placed financial stress on the utility. 

Outlook 
The stable outlook reflects what we consider to be consistent, predictable 
cash flow generation, supported by regulated and limited commodity exposure. 
We could lower the stand-alone credit profile and the rating at least one 
notch if there is a material, adverse regulatory ruling or if the company 
makes material debt financed investments outside of its LDC business. An 
upgrade in the next two years is unlikely without material deleveraging.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010
     -- Key Credit Factors: Business And Financial Risks In The Investor-Owned 
Utilities Industry, Nov. 26, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Outlook Revised To Stable

                                  To                  From
ENTEGRUS Inc.
 Corporate credit rating          A/Stable/--         A/Negative/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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