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” as well as its Commercial Paper rating at R-1 (low) and its Cum. & Cum. Redeemable Convertible Preferred Shares at Pfd-2 (low). All trends are Stable. The rating confirmations reflect DBRS’s view that the Company’s business risk profile remains strong, underpinned by its strong service area, large customer base and reasonable customized Incentive Regulation (IR) plan from 2014 through 2018. The risk associated with the Greater Toronto Area Expansion Project (the GTA Project) has also been substantially reduced by the end of 2015 as it is close to completion. The confirmations and the Stable trends reflect EGD’s good financial profile with solid credit metrics and reasonable liquidity.

DBRS views the Company’s five-year customized IR as supportive of the current rating. EGD has the ability to file annual updates on volume and debt expenses, thereby significantly reducing forecast errors. Allowed return on equity (ROE) for 2016 is 9.19%. Although this is lower than the ROE of 9.30% in 2015, it remains higher than the ROE that is allowed for gas distribution in other Canadian jurisdictions. Fuel costs for EGD are additionally passed through to customers and adjusted quarterly. The Company has filed its 2016 rate application and the decision is expected to be issued in Q2 2016. DBRS does not expect the decision to have any material impact on EGD’s earnings.

In January 2015, the Company began construction on the GTA Project, which will extend the distribution system to service the growing population in the GTA. The cost was initially estimated at $700 million with the final cost estimated at $930 million. Cost overruns are not expected to be added to the rate base until the next re-basing year in 2019, exposing EGD to regulatory lags; however, DBRS considers this risk to be manageable with the Company’s reasonable liquidity and good balance sheet. The GTA Project is expected to be completed by the end of Q1 2016. During this build-out, EGD’s credit metrics have remained supportive of the current ratings. As the financing of the GTA Project is largely completed, DBRS does not expect any material change in credit metrics over the near to medium term.

The Company has also maintained reasonable liquidity through the end of 2015, reflecting (1) over $700 million in undrawn facilities, (2) minimal long-term debt due in 2016 and (3) stable cash flow from operations.

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 (October 2015), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.

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