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