DBRS Confirms Enbridge Gas Distribution Inc. at “A,” Stable Trends

DBRS has today confirmed the Issuer Rating and the Unsecured Debentures & Medium-Term Notes rating of Enbridge Gas Distribution Inc. (EGD or the Company) at “A,” the Commercial Paper rating at R-1 (low) and the Cum. & Cum. Redeemable Convertible Preferred Shares rating at Pfd-2 (low). All trends are Stable. The Company’s ratings are based on its low-risk business profile, supported by a stable regulatory environment in Ontario and a strong franchise area with a large customer base. The confirmation factors in DBRS’s expectation that the Company will continue to finance its free cash flow deficits to maintain its credit ratios within DBRS’s “A” rating category.

EGD’s business risk profile is indicative of an “A” rating, underpinned by the following factors: (1) EGD operates under a stable regulatory system. In 2013, following the five-year Incentive Regulation (IR) period, EGD operated under the Cost-of Service (COS) system. The move to COS methodology provided the Company with an opportunity to rebase and earn a higher return on equity (ROE) (8.93% compared with 8.39% in the IR period), while the deemed equity remained unchanged at 36%, which is relatively low compared with other jurisdictions. Natural gas supply costs continue to be passed through to EGD’s customers. (2) EGD’s franchise area, primarily the Greater Toronto Area (GTA), is viewed as one of the most economically strong service areas in Canada. In addition, the Company’s large customer base of over two million should provide it with a critical mass to meet or exceed its efficiency factor during the next IR term (2014-2018). The Company filed an IR application for the 2014-2018 period in July 2013, and the decision by the Ontario Energy Board (OEB) is expected in Q2 2014. Should the OEB render an unfavourable decision to the extent that it may have a materially negative impact on the Company’s future earnings and cash flow, a negative rating action could follow (although this will not likely be the case).

EGD’s financial profile reflects an “A” rating, with all credit metrics remaining solidly within the current rating range. However, two concerns over the near to medium term are as follows: (1) Significant liquidity is required to finance EGD’s volatile working capital (mostly gas inventory for winter distributions). EGD’s liquidity is currently viewed as adequate to meet its operational needs given low natural gas prices. Should natural gas prices increase significantly, DBRS expects EGD to properly manage its liquidity to cope with that situation. (2) Large free cash flow deficits are expected over the next two years because of the $686.5 million GTA Expansion project. EGD’s parent (Enbridge Inc.) is expected to continue providing financial support for EGD. DBRS expects EGD to finance its cash flow shortfalls while maintaining the debt leverage within the regulatory capital structure and all other credit metrics within the DBRS “A” rating range. This project has been approved by the OEB and should provide good earnings growth once it is in service, which is expected to occur by the end of 2015.

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 methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

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