DBRS Confirms Ratings on Enbridge Gas Inc. at “A” and R-1 (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Notes rating of Enbridge Gas Inc. (EGI) at “A” and EGI’s Commercial Paper rating at R-1 (low). All trends are Stable. EGI was formed following the amalgamation of Enbridge Gas Distribution Inc. (EGD) and Union Gas Limited (Union Gas) on January 1, 2019 (the Amalgamation; see the DBRS press release on EGI dated January 2, 2019). The rating confirmations reflect (1) EGI’s stable business risk profile, as the Ontario Energy Board’s (OEB) decision on the Amalgamation is expected to provide a reasonable framework for EGI to achieve or exceed the allowed return on equity (ROE) and strong cash flow over the deferred rebasing period from 2019 through 2023, and (2) its improved credit metrics in 2018 and for the last 12 months (LTM) ended June 30, 2019, compared with the combined 2017 results of EGD and Union Gas (pro forma by DBRS).

Post Amalgamation, EGI has a large customer base of approximately 3.7 million across Ontario. This customer base is the largest in Canada and one of the largest in North America for a natural gas distributor. A large customer base is one of the key factors for EGI to achieve operating efficiency under the price-cap incentive regulation (IR) through 2023. Significant synergy is expected to be achieved over the next five years and EGI is allowed to keep 100% of the earnings up to 150 basis points (bps) in excess the allowed ROE (8.98% for 2019 and will be reset annually). DBRS also expects the reliability and flexibility of the natural-gas supply to improve significantly compared with EGD as a result of the addition of Union Gas’s storage facilities. The ratings incorporate EGI’s exposure to volume risk and potential regulatory lag with respect to the recovery of natural-gas costs when the price of natural gas increases substantially.

EGI’s 2017 pro-forma credit metrics (DBRS combined EGD’s and Union Gas’s 2017 results) were modestly weak, reflecting the fact that Union Gas’s metrics were under pressure as a result of a large capex program. However, they improved in 2018 and the LTM 2019 and are supportive of the current ratings. EGI’s credit metrics are expected to improve further over the medium term, reflecting operating efficiency and incremental cash flow from a growing rate base.

DBRS expects EGI to generate free cash flow deficits (after capex and dividends to its common shareholders) over the medium term as EGI’s capex program remains sizable (estimated to be around $1.0 billion in 2019 and 2020). DBRS expects EGI to fund its future capital projects and to manage its dividend policy in a way that the capital structure will be maintained in line with the OEB-approved capital structure of 64% debt and 36% equity. DBRS does not expect any positive rating actions during the deferred rebasing period through 2023. 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 risk profile or (2) EGI experiences a significant deterioration of its credit metrics on a sustained basis. These scenarios are considered unlikely by DBRS.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Criteria: Commercial Paper and 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.

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 addi¬tional 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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