DBRS Study Reviews Recent Regulatory Changes in the Canadian Pipeline and Utility Sectors
A DBRS industry study published today provides details on several provincial and federal regulatory decisions that were announced in Q4 2009. The decisions affect how allowed levels of both return on equity (ROE) and the equity component in the capital structure for Canadian pipeline and utility entities are determined. These two critical factors are used in a regulated entity’s cost of service calculation and, therefore, have a direct impact on its financial results and credit metrics.
“In terms of magnitude of change, the six decisions handed down in Q4 2009 can generally be divided into three groups,” says Michael Caranci, Managing Director, “with DBRS viewing the decisions by the National Energy Board and the British Columbia Utilities Commission as the most material, followed by the Alberta Utilities Commission and Ontario Energy Board rulings. The decisions by Québec’s Régie de l’energie and Newfoundland and Labrador’s Board of Commissioners of Public Utilities deviate the least from the status quo.”
These recent decisions are viewed as a positive for the credit metrics of the affected pipeline and utility entities, although transparency has in certain instances been diminished. An improvement in a regulated entity’s ROE and/or equity thickness would be viewed positively in the context of its financial risk profile. On the other hand, deteriorating ROE levels have not had a direct negative effect on DBRS ratings of pure pipeline and utility companies. Therefore, recent increases in approved ROE levels or equity thickness should not, in themselves, result in positive rating actions unless the improvement is significant enough to be viewed as a material reduction in financial risk.
“None of the decisions rendered in Q4 2009 are viewed by themselves as materially changing any one entity’s financial risk profile,” concludes Mr. Caranci. “Rather, the improvements are viewed as supportive of current ratings and would improve flexibility within the rating category.”
If you are interested in receiving a copy of this study, please email info@dbrs.com.