DBRS Finalizes Enbridge Gas Inc. Provisional Ratings; Discontinues Enbridge Gas Distribution Inc. and Union Gas Limited Ratings

DBRS Limited (DBRS) finalized its provisional Issuer Rating of “A,” the provisional Senior Unsecured Notes (the Notes) rating of “A” and the provisional Commercial Paper (CP) rating of R-1 (low) of Enbridge Gas Inc. (EGI), following completion of the amalgamation of Enbridge Gas Distribution Inc. (EGD) and Union Gas Limited (UGL) on January 1, 2019, to form EGI. All trends are Stable. As the outstanding Notes and CP of EGD and UGL were assigned to EGI upon completion of the amalgamation, DBRS has consequently discontinued all ratings of EGD and UGL. The final ratings and trends reflect DBRS’s expectation that the amalgamation will not have a material impact on EGI’s credit profile compared with that of its predecessor companies, EGD and UGL.

On August 30, 2018, the Ontario Energy Board (OEB) approved the amalgamation with the following key provisions: (1) The initial term of the rate order was approved for a five-year period, after which rates will be rebased; (2) The earnings sharing mechanism was approved at 50/50 between shareholders and customers for earnings in excess of 150 basis points over the allowed rate of return; and (3) The approved rate-setting mechanism will be tied to an inflation factor, less a productivity factor of zero and a stretch factor of 0.3%.

On October 15, 2018, Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS), the ultimate owner of EGD and UGL, announced that it would proceed with the amalgamation with an expected effective date on January 1, 2019.

Following the amalgamation, the size of EGI’s franchise area and the number of customers has significantly increased compared with those of the individual predecessor companies. The key determinations in the OEB decision are expected to provide a stable framework for EGI’s operations to support the ratings.

On a pro forma basis, EGI’s credit metrics have been under pressure in recent years due to large capital expenditures (capex) in excess of cash flow generation. However, higher earnings and cash flow resulted in improved credit metrics in the nine months ending September 30, 2018, compared with the same period in 2017. These metrics are expected to be supported in the medium term by lower combined capex requirements. DBRS expects the capital structure and the dividend policy for EGI to be supportive of the ratings because of the strong regulatory protection of a regulated utility in Ontario.

DBRS does not expect positive rating action on EGI’s ratings over the medium term. However, a negative rating action could be taken if (1) there is an adverse regulatory change that has a negative impact on EGI’s business profile or (2) EGI experiences a significant sustained deterioration of its credit metrics. These scenarios are considered unlikely by DBRS.

Notes:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies & Criteria.

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.

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

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.

For more information on this credit or on this industry visit info@dbrs.com.

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