DBRS Confirms Enbridge Gas Distribution Inc. at “A,” Stable Trend

DBRS Limited (DBRS) 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 rating at Pfd-2 (low). All trends are Stable. The rating confirmations reflect EGD’s stable business risk profile and good financial metrics as at June 30, 2017, albeit modestly weaker than in 2016.

EGD’s business risk profile remained strong, supported by a large customer base and the stable regulatory framework in the Province of Ontario. EGD is in the fourth year of a five-year customized Incentive Regulation plan through 2018. In December 2016, EGD received the final rate order on its 2017 rate application from the Ontario Energy Board (OEB). The rate order lowered EGD’s return on equity (ROE) for 2017 to 8.78% from 9.19% in 2016, while the deemed equity at 36.00% in the capital structure remains unchanged. DBRS does not view the decrease in ROE to have a material impact on EGD’s earnings and cash flow, as EGD continues to benefit from a growing rate base.

The completion of the western and eastern segments of the Greater Toronto Area expansion project (the GTA Project) in 2016 significantly reduced the construction risk associated with the project. The cost of the GTA Project is estimated to be approximately $875 million. Estimated cost overruns of approximately $185 million are not expected to be added to the rate base until the Company’s rebasing year in 2019.

EGD’s credit metrics have been under pressure during the construction of the GTA Project but remained solid in H1 2017. Although EGD’s capital structure has been stable over the past few years, the cash flow-to-debt ratio and EBIT-to-interest coverage ratio in H1 2017 were negatively affected by lower earnings caused mainly by warmer weather and the timing of the cost recovery. However, these two ratios are expected to improve over the medium term, reflecting incremental cash flow from a higher rate base and a reduction in capital expenditures. DBRS is of the view that given the current regulatory regime in Ontario, the rating upside is limited. However, a negative rating action is possible if any of the following occurs: (1) an adverse decision by the OEB or a change in EGD’s business structure that negatively affects EGD’s business risk profile or (2) the cash flow-to-debt ratio declines further, moving to below the “A” range, and is unlikely to recover within a reasonable time frame.

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 Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry; DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers; and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, 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.