DBRS Confirms Westcoast Energy Inc. at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Westcoast Energy Inc. (Westcoast or the Company) at A (low). DBRS has also confirmed the Company’s Commercial Paper rating at R-1 (low) and First Preferred Shares – cumulative, redeemable rating at Pfd-2 (low). All trends are Stable. The rating confirmations reflect Westcoast’s well-diversified portfolio of transmission, processing and distribution businesses that generate largely low-risk regulated cost-of-service- and take-or-pay-based earnings. The Company’s financial profile remained reasonable for the current rating category.

Westcoast’s Transmission and Processing segment (T&P; 54% of EBITDA for the last 12 months (LTM) ended March 31, 2016) benefits largely from full cost-of-service-based regulated toll settlements in its pipelines business and firm take-or-pay contracts in its gathering and processing operations. Nearly 90% of Westcoast’s Distribution segment (46% of EBITDA) is rate regulated, generating relatively stable cash flows. A majority of the Company’s revenues are supported by investment-grade customers. Historically, Westcoast’s Empress natural gas liquids (NGL) marketing operations, within the T&P segment, have exposed the Company to commodity prices and fractionation spread risk. Empress earnings were negatively affected in 2015 and are likely to remain weak for a major part of 2016 because of the continued weakness in NGL markets. DBRS views the Company’s recent announcement to sell its Empress NGL operations to Plains Midstream Canada ULC as modestly positive, as it eliminates exposure to commodity-price-related risks. The sale is expected to close in H2 2016.

DBRS notes that the Company’s significant expansion capital expenditure (capex) is likely to continue over the next several years. All of the expansion projects currently under execution are allocated to the low-risk regulated Distribution segment (approximately 60%) and commercially secured under cost-of-service-based tolls in the T&P segment. Westcoast’s Dawn-Parkway expansion projects at Union Gas Limited (rated “A,” Stable trend, by DBRS) continue to advance to connect diverse and competitive natural gas supplies from the Marcellus and Utica basins to high-demand markets in Ontario and Eastern Canada. Abundant supply in the gas-rich Montney region in British Columbia also supports the Company’s T&P infrastructure expansion plans, primarily for the BC Pipeline. Westcoast’s credit metrics have come under pressure as the Company has funded its expansion capex largely with a combination of operating cash flow and debt. DBRS expects credit metrics to be pressured in the near term and improve thereafter as these growth projects are placed in service and provide incremental cash flow. The Company’s liquidity position remains adequate. While DBRS does not expect Westcoast’s ratings to be upgraded in the medium term, downward pressure on ratings could result if metrics continue to weaken from the current levels for a sustained period. Going forward, DBRS expects the Company to fund its capex and dividends 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.

The applicable methodologies are Ratings Companies in the Pipeline and Diversified Energy Industry (December 2015); Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015); DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Financial Issuers (April 2016); and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under methodologies.

This rating was initiated at the request of the rated entity.