DBRS Confirms NOVA Gas Transmission Ltd. at A (low), Stable Trend

DBRS Limited (DBRS) confirmed the rating on the Medium-Term Notes & Unsecured Debentures issued by NOVA Gas Transmission Ltd. (NGTL or the Company) at A (low) with a Stable trend. The rating primarily reflects the strong financial and liquidity support from NGTL’s parent, TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS) and a supportive regulatory framework that allows the Company to recover costs and earn an adequate return on its investment base over a reasonable time frame.

NGTL’s earnings are regulated by the National Energy Board (NEB) and are based on cost recovery plus a return on equity (ROE) framework. Consequently, NGTL’s earnings are not exposed to short-term fluctuations in the price of natural gas or changes in throughput volumes or contracted capacity levels, providing the Company with predictable cash flows. The Company is operating under the NEB-approved 2018-2019 Revenue Requirement Application (2018 RRA) which is effective until year-end 2019. The 2018 RRA provides fixed annual operating, maintenance and administration (OM&A) costs of $225 million in 2018 and $230 million in 2019; recovery of higher depreciation rates; allowed ROE of 10.1%; and deemed common equity of 40.0%. Any variance between fixed OM&A costs in the 2018 RRA and actual costs are to accrue to both NGTL and the shippers equally. In March 2019, NGTL filed an application with the NEB addressing the rate design and terms and conditions of service for the NGTL System and a tolling methodology for the North Montney Mainline Project.

Production in the Western Canadian Sedimentary Basin continues to grow as it is one of the lowest supply cost plays in North America. Consequently, NGTL’s investment base is also set to grow as the NGTL System expands to accommodate the growing production. NGTL placed $0.6 billion of projects into service in 2018 and has announced medium-term plans to develop approximately $9.5 billion of commercially secured expansion and maintenance projects. NGTL plans to place $2.8 billion of new facilities in service during 2019. Subject to regulatory approvals, the remaining projects are expected to be completed and placed in service over the medium term (2019 to 2022+).

NGTL’s elevated capex program (2019: $2.7 billion) over the next three years is expected to be funded largely with debt from its parent, TCPL. While earnings and cash flows are expected to improve as projects are completed and placed in service, NGTL’s cash flow-to-debt and debt-to-capital ratios are expected to be pressured in the medium term (as at the last 12 months ended March 31, 2019, cash flow-to-debt was 9.7% and debt-to-capital was 82.8%) due to the large capex program. DBRS expects TCPL to continue to provide financial, liquidity and operational support to NGTL.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Guarantees and Other Forms of Support, 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.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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