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

DBRS Limited (DBRS) 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 First Preferred Shares - cumulative, redeemable rating at Pfd-2 (low). All trends are Stable. The rating confirmations factor in the proposed sale of Westcoast’s B.C. field services (BCFS) and midstream businesses (described below) and are underpinned by the Company’s diversified portfolio of natural gas transmission, distribution and storage assets that generate largely low-risk regulated cost-of-service (COS) earnings. The Company’s financial profile remains reasonable for the current ratings, and DBRS expects Westcoast to use the proceeds of the sale of the BCFS and midstream assets in a manner that will maintain Westcoast’s financial metrics at levels consistent with the current ratings.

In July 2018, Enbridge Inc. (ENB; rated BBB (high) with a Stable trend by DBRS), the parent of Westcoast, announced that it has agreed to sell its Canadian gathering and processing business in British Columbia (B.C.) and Alberta to Brookfield Infrastructure Partners L.P. and its institutional partners for a cash purchase price of $4.31 billion, subject to customary closing adjustments and receipt of regulatory approvals. These businesses include the BCFS and midstream businesses, which are part of Westcoast’s Transmission & Processing (T&P) segment as well as legacy ENB assets. ENB has entered into separate sale agreements for those assets governed by provincial regulations in Alberta and B.C. and those governed by National Energy Board (NEB) regulations. The sale of the provincially regulated assets is expected to close in 2018, while the sale of the federally regulated assets is expected to close in mid-2019.

DBRS views the sale of Westcoast’s BCFS and midstream businesses as moderately positive for the Company’s business risk profile, as it eliminates volume risk associated with the fee-for-service contracts at the BCFS and midstream businesses. After completion of the sale, Westcoast’s T&P segment will primarily consist of the B.C. Pipeline and the Maritimes & Northeast Pipeline, both long-haul natural gas transmission systems regulated by the NEB under full COS regulation with no associated commodity or volume risk. Westcoast continues to benefit from stable earnings and cash flow at its Distribution segment, which consists, predominantly, of rate-regulated operations at Union Gas Limited (Union; rated “A” with a Stable trend by DBRS). The Ontario Energy Board (OEB) has recently approved Union and Enbridge Gas Distribution Inc.’s (EGD; rated “A” with a Stable trend by DBRS) application to amalgamate. The final decision to amalgamate is dependent on Enbridge’s assessment of the decision. If completed, the amalgamation is not expected to affect the Company’s business risk profile, as EGD and Union are comparable in size, operate under a similar regulatory framework and are rated on par with each other.

Westcoast’s key credit metrics have improved for the last 12 months ended June 30, 2018, relative to 2017, as the Company benefits from incremental earnings from expansion projects placed in service in late 2017 and early 2018, especially at B.C. Pipeline. While earnings from the T&P segment will be lower after completion of the sale of the BCFS and midstream businesses in mid-2019, the impact of lower earnings on key credit metrics at both the stand-alone and consolidated levels is expected to be offset by lower debt levels. The Company is expected to use part of the proceeds from the sale to repay scheduled debt maturities. DBRS expects the credit metrics to gradually improve further as growth projects are placed in service and generate incremental cash flow. The Company’s liquidity position remains adequate.

DBRS notes that the Company’s significant growth capital expenditures (capex) are likely to continue over the medium term. The growth capex is primarily allocated to (1) B.C. Pipeline (approximately 65%), supported by abundant supply from the prolific gas basins in B.C., and (2) Union (approximately 35%), supported by 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.

While DBRS does not expect Westcoast’s ratings to be upgraded in the medium term, downward pressure on the ratings could result if metrics 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 ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry, 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: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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