Press Release

DBRS Confirms Westcoast Energy at A (low) and R-1 (low)

Energy
October 19, 2010

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The ratings are based on the following factors:

(1) Westcoast’s business risk profile remains relatively strong. The Company derived 87% of its segment EBIT from low-risk, mostly regulated operations in 2009, up from approximately 80% in 2007–2008. The main non-regulated business is Empress NGL Marketing (Empress; 13% of 2009 segment EBIT; approximately 20% of segment EBIT in 2007–2008), which is subject to earnings and cash flow volatility associated with exposure to commodity prices, fractionation spreads and throughput volumes. Empress benefited from strong industry conditions in 2007–2008. However, reversal of this trend, beginning in Q4 2008, resulted in a substantial EBIT decline and a higher proportion of low-risk segment EBIT in 2009, a trend that is likely to continue in full-year 2010.

Earnings and cash flow from Empress generally benefit from low natural gas prices relative to crude oil prices, while Westcoast’s British Columbia (B.C.) Pipeline and Field Services Divisions (BCPFS), Spectra Energy Facilities L.P. (Midstream) and Union Gas Limited (Union Gas; 46% of 2009 segment EBIT) businesses can be negatively affected by lower throughput under that scenario, resulting in a natural hedge and diversification benefits for the Company. While the BCPFS and Midstream facilities are mainly located near the most promising natural gas exploration and development fields in western Canada, exploration and drilling activity in the other operating areas of BCPFS and Midstream have been relatively low in recent years.

If low gas prices persist, BCPFS and Midstream EBIT could be negatively affected, although this would be partly mitigated by strong regulatory and contractual arrangements and strong activity in the Montney and Horn River basins of B.C. DBRS believes that these low-risk operations will benefit over the medium to long term from strong exploration and drilling activity in Westcoast’s key areas given the Company’s plan to bring about $1.5 billion of growth projects with long-term contractual commitments (see below) into service in stages through 2013, supporting a high component of low-risk EBIT for the Company.

(2) Westcoast’s financial profile improved in recent years, largely due to de-leveraging efforts through 2007 and, until Q4 2008, increasing earnings and cash flow from Empress. This resulted in stronger credit ratios, although with more volatility than in the past. On July 10, 2009, Westcoast borrowed $500 million from an affiliate on a subordinated basis, paid a common stock dividend of $524 million to its shareholders and issued a new class of preferred stock to an affiliate for $50 million. The Company indicated that this intercompany transaction would result in a more efficient capital structure. While the transaction contributed to weaker credit metrics in 2009 (with cash flow-related metrics also affected by a significant future income tax reversal), the impact on Westcoast’s key external debt credit metrics was moderate, resulting in no impact on the ratings.

On a consolidated basis (excluding the intercompany transaction), the Company’s external debt-to-capital ratio decreased to 53% at June 30, 2010, from 54% at year-end 2008, while cash flow-to-external debt (18% for the 12 months ending June 30, 2010, down from 19% in 2008) and external fixed charges coverage (2.4 times, down from 2.5 times) weakened marginally, partly due to the reduction in Empress EBIT noted above.

On a non-consolidated basis, Westcoast’s direct ownership of BCPFS fully supports its ability to meet its direct debt obligations. Its credit metrics are enhanced by the receipt of cash dividends from several sources, the largest of which is Union Gas, which generate approximately 40% to 50% of the Company’s non-consolidated cash flow. Excluding the intercompany transaction, Westcoast’s non-consolidated external debt-to-capital ratio increased to 35% in 2009 from 32% in 2008, while cash flow-to-external debt (18%, up from 16%) and external fixed charges coverage (2.4 times, up from 2.2 times) improved, mainly as a result of higher gathering and processing revenues due to higher firm volumes at BCPFS.

Given its focus on mostly regulated operations in which it has a controlling interest, Westcoast should generate sufficient cash flow to meet a significant portion of its capex and dividend payments going forward, with manageable funding needs at both Union Gas and the Company. Westcoast’s consolidated credit metrics will likely be pressured over the medium term as a result of its significant growth capex (see below). DBRS expects the Company to manage its medium-term capex program to result in a marginal impact on its key credit ratios.

(3) The Company’s 2010 capex program is expected to total approximately $900 million, distributed between growth ($500 million) and maintenance ($400 million), of which $243 million (including $114 million for expansion) was spent during the first six months of 2010 (6M 2010). The 2010 program includes capex of $600 million for its natural gas transmission and processing (T&P) segment (for expansion of processing and associated pipeline capacity in the Fort St. John (Montney) and Fort Nelson (Horn River) areas of B.C.) and $300 million for Union Gas (mostly for maintenance). This compares with 2009 capex of $650 million.

Westcoast’s Fort Nelson Area Expansion project is a multi-phased expansion program to increase gathering and processing capacity in Fort Nelson to accommodate natural gas production from the Horn River basin. The Company has received firm take-or-pay commitments from ten customers for 790 million cubic feet per day (mmcf/d) of capacity. The expansion involves the reactivation of existing processing capacity at the Fort Nelson plant, the looping and reconfiguration of area gathering and compression and the addition of new processing capacity at the Cabin Lake compressor station, with staged in-service dates through 2012.

The Company’s Montney Expansion, which involves construction of a new 200 mmcf/d natural gas processing plant west of Dawson Creek, is also fully contracted and will be built in two phases. The first phase will result in 100 mmcf/d of available processing capacity in late 2011, with the remaining capacity available in early 2013.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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