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 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 utility, gas transmission and processing businesses that generate largely low-risk regulated cost-of-service (COS) and firm contractual earnings. The Company’s financial profile remained reasonable for the current rating category.

On February 27, 2017, Enbridge Inc. (Enbridge; rated BBB (high) with a Stable trend by DBRS) and Spectra Energy Corp. (Spectra) completed a stock-for-stock merger and, as a result, Westcoast became an indirect, wholly owned subsidiary of Enbridge. DBRS viewed the overall impact of the merger on the stand-alone credit profile of Westcoast, Union Gas Limited (Union; 100% owned by Westcoast; rated “A” with a Stable trend by DBRS) and the Maritime & Northeast Pipeline Limited Partnership (78% owned by Westcoast; rated “A” with a Stable trend by DBRS) to be neutral. (Refer to the September 8, 2016, press release, “DBRS Confirms Spectra Energy Capital, LLC and Rated Subsidiaries, Removes UR-Dev. Status.”)

Westcoast’s Distribution segment (57% of EBITDA for 12 months ended March 31, 2017) is largely rate regulated, generating relatively stable cash flows. Westcoast’s Transmission and Processing segment (T&P; 43% of EBITDA) benefits largely from regulated full COS-based tolls on its pipelines business and firm take-or-pay contracts in its gathering and processing operations. A majority of the Company’s revenues are supported by investment-grade customers. On August 4, 2016, Westcoast completed the sale of its ownership interest in Empress NGL to Plains Midstream Canada ULC. DBRS views the transaction as modestly positive, as it eliminated exposure to commodity price risks.

DBRS notes that the Company’s significant growth capital expenditure (capex) is likely to continue over the next several years. All of the growth projects currently under execution are allocated to the (1) low-risk regulated Distribution segment (approximately 75%) and (2) commercially secured under COS-based tolls in the T&P segment. Westcoast’s projects in execution at Union are demand-pull expansions to connect diverse and competitive natural gas supplies from the Marcellus and Utica basins to high-demand markets in Ontario and Eastern Canada. The Company’s infrastructure expansion plans for the B.C. Pipeline are supported by abundant supply from the prolific gas basins in British Columbia.

Westcoast’s credit metrics have weakened in the past few years because of the Company’s substantial capex program. DBRS expects credit metrics to be pressured in the near term and gradually improve thereafter as 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 principal methodologies are Ratings Companies in the Pipeline and Diversified Energy Industry, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.