DBRS Confirms Westcoast Energy Inc. at A (low), R-1 (low) and Pfd-2 (low), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Westcoast Energy Inc. (Westcoast or the Company) at A (low) as well as its Commercial Paper rating at R-1 (low) and First Preferred Shares rating at Pfd-2 (low). All trends are Stable. The rating confirmations reflect Westcoast’s strong business risk profile supported by low-risk regulated or fee-for-service operations accounting for nearly 95% of the Company’s earnings and provide downside protection from the current low commodity price environment. The Company’s financial profile remained reasonable for the current rating category.

Westcoast’s operations are well diversified with its Transmission and Processing segment (T&P) accounting for 53% of EBITDA (last 12 months ended March 31, 2015). Over 90% of T&P earnings benefit from firm take-or-pay contracts in its gathering and processing operations and full cost of service-based regulated rate settlements in its pipelines business. A major portion of Westcoast’s gas distribution business (47% of EBITDA) is rate-regulated as a utility and generates stable cash flows; however, Westcoast’s Empress natural gas liquids marketing operations (2.5% of EBITDA) within the T&P segment are exposed to commodity prices and fractionation spread risk, causing variability in the segment’s earnings.

Wescoast continues to pursue growth opportunities in its distribution business supported by strong natural gas flows at its Dawn Hub in Ontario and distribution infrastructure needed to take advantage of diverse and competitive supply options from Marcellus and Utica. Growing supply dynamics in the gas-rich Montney region in British Columbia and liquefied natural gas export initiatives also support the Company’s T&P infrastructure expansion plans. The Company invested approximately $4.5 billion in capital expenditures (capex) in the past five years with an additional $1.2 billion in capex planned for 2015 ($167 million spent as of Q1 2015), including $750 million of growth capital. While the capex program is substantial, much of the expansion spending is commercially secured or allocated to the lower-risk Distribution segment (approximately 70%), which is supported by predetermined regulatory rate adjustments for major capex and contracts with investment-grade storage and transmission customers. DBRS expects credit metrics to be marginally weaker in the near term due to Westcoast’s expansion plans, but to become more manageable once these projects are placed in service and provide incremental cash flow; however, downward pressure on ratings could result should metrics continue to remain weak into the medium term. Going forward, DBRS expects the Company to fund its capex and dividend program prudently and maintain credit metrics in line with the current rating category.

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