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,” 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 through 2018 and its improved credit metrics as at June 30, 2018. The Stable trends reflect DBRS’s expectation that the amalgamation of EGD and Union Gas Limited (rated “A” with a Stable trend by DBRS) (the Combined Entity), approved by the Ontario Energy Board (OEB) on August 30, 2018, and potentially taking effect on January 1, 2019 (subject to Enbridge Inc.’s (rated BBB (high) with a Stable trend by DBRS) approval) would not have a material impact on the Combined Entity’s credit profile.

In December 2017, EGD received the final rate order from the OEB on its 2018 rate application (the OEB Decision), which increased EGD’s return on equity (ROE) for 2018 to 9.00% from 8.78% in 2017 and maintained the deemed equity in the capital structure at 36%. The increase in ROE will have a slightly positive impact on EGD’s earnings and cash flow in 2018. Following the amalgamation, under the Combined Entity, the size of the franchise area and the number of customers will significantly increase. The key determinations in the OEB Decision are expected to provide a stable framework for the Combined Entity’s operations to support the current ratings.

EGD’s credit metrics have been under pressure during the last few years because of large capital expenditures. However, higher earnings and cash flow, as well as lower debt levels, resulted in improved credit metrics in the first half of 2018. These metrics are not expected to materially change under the Combined Entity. DBRS expects the capital structure and the dividend policy for the Combined Entity to remain supportive of the current ratings because of the strong regulatory protection of a regulated utility in Ontario.

Based on DBRS’s review of the OEB Decision, DBRS does not expect the ratings of the Combined Entity to change from EDG’s ratings because the amalgamation would be a merger of two “A”-rated regulated entities operating in the same regulatory jurisdiction. However, a negative rating action could be taken if (1) there is an adverse regulatory change that has a negative impact on the Combined Entity’s business profile or (2) the Company experiences a significant deterioration of its credit metrics on a sustained basis. These scenarios are considered unlikely by DBRS.

Notes:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017), 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.