DBRS Confirms Union Gas at “A” and R-1 (low), Stable Trends

DBRS has today confirmed the Issuer Rating of Union Gas Limited (Union or the Company) at “A”, its Commercial Paper rating at R-1 (low), its Unsecured Debentures/Medium-Term Note Debentures at “A” and its Cumulative Redeemable Preferred Shares at Pfd-2, all with a Stable trend. The rating confirmation reflects DBRS expectation that: (1) Union’s low risk regulated gas distribution business will continue to account for the bulk of the Company’s earnings (-80% in 2013), providing stability; and (2) the Company will continue to fund capital expenditures while maintaining its key financial metrics.

Union’s business risk profile is indicative of an “A” rating based on regulatory and franchise strengths of the Company’s natural gas utility business in Ontario. DBRS views the recent five year incentive regulation framework approved by the Ontario Energy Board (OEB) through a settlement process for 2014-2018 as reasonable due to the following factors: (1) allows the Company to earn a higher return on investment than domestic peers on average; (2) provides predictable cash flow as capital expenditures (capex) are pre-approved, subject to certain criteria, for inclusion in the rate base; and (3) annual rate escalation each year at 40% of inflation. DBRS expects the Company to maintain its current financial profile by prudently financing its proposed capital expenditures on expansions and upgrades using a combination of operating cash flow, debt and managing dividend payouts.

In February 2014, the OEB provided regulatory approval for $423 million in capex to expand Union’s Dawn to Parkway gas transmission system starting in 2015. The expansion is expected to help grow the rate base and diversify fuel sources, reducing its reliance on supply from Western Canada. The funding of this capex initiative is not expected to result in material deterioration of current credit metrics and remain within regulatory parameters.

One of the key challenges that could impact Union’s future ratings is its growing exposure to the higher risk, non-regulated storage business. The confirmation assumes that the future mix between regulated earnings and non-regulated earnings will remain at or close to the current mix of 80%/20%.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions) which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.