DBRS Confirms Gaz Métro Inc. at “A,” Stable

DBRS Limited (DBRS) has today confirmed the ratings of Gaz Métro inc. (GMi or the Company) as listed below, all with Stable trends. The ratings of GMi are based on the credit quality of Gaz Métro Limited Partnership (GMLP or the Partnership), which guarantees GMi’s First Mortgage Bonds, Senior Secured Notes and a secured credit facility that supports the Commercial Paper. GMi is the general partner of GMLP and serves as its financing entity.

The credit quality of the Partnership has remained relatively stable over the past year. GMLP’s diverse portfolio of low-risk regulated businesses, which accounted for more than 95% of consolidated earnings for the fiscal year ended September 30, 2015 (F2015), have continued to provide predictable earnings and cash flow. Recent regulatory decisions have also all been reasonable. In May 2015, the Régie de l’énergie approved the authorized return on deemed equity (ROE) for 2016 and 2017 at 8.90% for the GMLP’s flagship entity, Gaz Métro-QDA, unchanged from 2015. DBRS views the recently authorized ROE for 2016 and 2017 as being fair given the continued low interest rate environment. As for Green Mountain Power Corporation (GMP), GMLP’s electricity distribution utility subsidiary based in Vermont, the authorized ROE for 2015 was reasonable at 9.44%. GMP has an opportunity to earn a higher actual ROE than that of the authorized ROE if GMP achieves its annual target merger savings (estimated at USD 21 million in 2016; of which 50% is retained by GMP). These two utilities combined accounted for approximately 85% of the Partnership’s consolidated earnings in F2015. GMLP’s smaller gas distribution utility, Vermont Gas Systems, Inc. (approximately 5% of total earnings), is exposed to construction cost overrun risk. The Addison Natural Gas Project’s capital budget has increased to USD 154 million from its 2013 initial estimate of USD 86 million. As a result, the Partnership took a pre-tax impairment charge of USD 10.3 million in F2015 following the agreement reached with the Vermont Department of Public Service. Negative earnings and cash flow impacts from the project cost overrun have been manageable within the current rating category.

The Partnership’s financial risk profile remained relatively stable in F2015 from F2014. Looking into F2016, DBRS does not expect any significant change in the Partnership’s financial risk profile as its estimated capital expenditure for F2016 (approximately $485 million excluding greenhouse gas emission allowance purchases) is expected to be financed in a prudent manner. In 2015, GMLP completed two equity offerings for aggregated gross proceeds of $255 million to maintain leverage in line with the regulatory target. Incremental earnings (supported by the sustained growth of regulated activities and higher earnings contribution from GMLP’s wind farm projects) are expected to be used to fund higher distributions.

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, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.