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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of Enbridge Gas Distribution Inc. (EGD or the Company) at “A,” the Company’s Commercial Paper rating at R-1 (low) and its Cum. & Cum. Redeemable Convertible Preferred Shares at Pfd-2 (low). All trends are Stable. The Company’s ratings are based on its low-risk business profile, supported by a reasonable and stable regulatory environment in Ontario and a strong franchise area with a large customer base of over two million. The confirmation incorporates risk faced by the Company with respect to financing and managing its $756 million Greater Toronto Area Project (GTA Project). The Stable trends factor in DBRS’s expectation that (1) the GTA Project will be completed on time (expected by the end of 2015) and within budget, and (2) the Company will finance free cash flow deficits (as a result of the GTA Project and/or increased working capital needs due to rising natural gas prices) in an appropriate manner to maintain its credit ratios consistent with DBRS’s “A” rating category, with leverage within the regulatory capital structure of 64% debt.

EGD’s business risk profile remains strong and consistent with its current ratings, underpinned by the following factors: (1) EGD operates under a reasonable and stable regulatory system. In 2014, the Company began its five-year customized Incentive Regulation (IR) period through 2018. Higher return on equity (ROE) was allowed in 2014 and 2015 (compared with prior years), while forecast risk is mitigated meaningfully by the Company’s having the ability to file annual updates on volume, capital cost and debt expenses. EGD can pass on to customers 100% of natural gas costs with quarterly adjustments. (2) EGD’s franchise area, primarily the 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 the critical mass to achieve or exceed the approved ROE over the five-year customized IR term (2014¬2018) under normalized weather. However, the short-term challenge faced by the Company will be project risk management associated with the GTA Project (DBRS recognizes that Enbridge Inc. has a good track record in building pipeline projects in time and within budget). Any significant cost overruns or lengthy delays would face serious regulatory review after the current IR period, with no assurance that the regulator will allow EGD to recover such costs. In addition, EGD faces a regulatory lag associated with natural gas cost recovery, which could be up to two years (instead of a normal 12-month period) should natural gas prices increase significantly above the approved costs included in rates (such as Q1 2014). In this situation, continual liquidity support from the parent (Enbridge Inc.) is required.

EGD’s credit metrics in 2014 remained consistent with its current ratings. However, in 2014, the Company had modestly higher leverage and lower cash flow metrics than in 2013 as a result of an increase in short-term debt to finance higher working capital needs. The increase in working capital was the result of higher inventory and gas prices during the 2014 winter and was financed with $204 million from EGD’s affiliates (including Enbridge Inc., its parent) and its revolving facility. This short-term debt increase is expected to be paid down over the next 12 months as the Company recovers the extra gas costs from customers (approved by the regulator). In 2015, financing the large free cash flow deficit caused by the $1.0 billion expected capex is critical. DBRS expects (1) the parent to continue to inject equity to fund the equity portion of the GTA Project and (2) for EGD to maintain debt leverage within the regulatory capital structure. Should EGD’s credit metrics weaken significantly from their current level, a negative rating action could occur.

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.

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

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.