DBRS Confirms Ratings on Westcoast Energy Inc. at A (low) and Pfd-2 (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating of Westcoast Energy Inc. (Westcoast or the Company) at A (low) as well as its First Preferred Shares - cumulative, redeemable rating at Pfd-2 (low) with Stable trends. The ratings are determined by evaluating the Company’s pipeline operations, which DBRS assesses at BBB (high) on a stand-alone basis, combined with the benefits of substantial dividends from an “A”-rated entity as described below. The rating confirmation reflects the Q4 2018 sale of Westcoast’s Midstream business; the anticipated sale of the B.C. Field Services (BCFS) business, which is expected to close in H2 2019; and the expected material earnings and cash flow decline from 78%-owned Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada; rated “A” with a Stable trend by DBRS) following the expiry of a number of transportation service agreements (TSAs) on November 30, 2019. DBRS expects Westcoast to use a substantial portion of the expected $1.8 billion from BCFS sale proceeds for debt reduction to maintain its financial metrics at levels that are acceptable for the current ratings.

DBRS views the sale of Westcoast’s Midstream and BCFS businesses as moderately positive for the Company’s business risk profile as it eliminates volume risk associated with their fee-for-service contracts. Following completion of the BCFS sale, Westcoast’s natural gas pipeline operations will primarily consist of the B.C. Pipeline and the M&NP Canada – long-haul natural gas transmission systems under full cost-of-service regulation with no associated commodity or volume risk. Westcoast also benefits from its 46% equity ownership of Enbridge Gas Inc. (EGI; rated “A” with a Stable trend by DBRS), an Ontario Energy Board-regulated natural gas distribution, storage and transmission franchise in Ontario that generates relatively low-risk, stable earnings and cash flow. Following the January 1, 2019, amalgamation of Union Gas Limited with Enbridge Gas Distribution Inc. to form EGI, Westcoast no longer owns a controlling interest in its gas distribution subsidiary; therefore, use of the “Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry” methodology has been discontinued. DBRS now evaluates Westcoast’s pipeline operations on a stand-alone basis and adds the benefits of EGI ownership to determine the Company’s ratings.

DBRS expects Westcoast’s earnings and cash flow from natural gas pipelines to be lower in 2020 following the completion of the BCFS sale and the TSA expiries at M&NP Canada, although the negative impact on key credit metrics is expected to be partly offset by the anticipated debt reduction. The Company’s liquidity position remains adequate.

In the first half of 2019, DBRS estimates that approximately 60% of Westcoast’s cash flow derived from EGI dividends. Following the anticipated BCFS sale closing and material decline in M&NP Canada cash flow, DBRS estimates that approximately 70% of Westcoast’s cash flow will derive from EGI dividends. While EGI’s credit profile is expected to remain strong over the medium term, any substantial increase in capex at EGI could potentially result in decreased dividend payments to Westcoast and weakened credit metrics.

Over the medium term, DBRS believes that a positive rating action is unlikely. A negative rating action is also unlikely, but could occur if Westcoast’s credit metrics weaken substantially below DBRS’s expectations on a sustained basis or potentially if EGI dividends are lowered on a sustained basis.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry; DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries; and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate 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.

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.

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