DBRS Morningstar Confirms Ratings of Westcoast Energy Inc. at A (low)/Pfd-2 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Westcoast Energy Inc.’s (Westcoast or the Company) Issuer Rating and Unsecured Debentures rating at A (low) and its First Preferred Shares – Cumulative, Redeemable rating at Pfd-2 (low), all with Stable trends. DBRS Morningstar determines its ratings by evaluating the Company’s pipeline operations 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 December 31, 2019, sale of Westcoast’s B.C. Field Services (BCFS) business and the material earnings and cash flow decline from 78%-owned Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada) following the expiry of a number of transportation service agreements (TSAs) on November 30, 2019. As expected, Westcoast used a substantial portion of the $1.8 billion BCFS sale proceeds for debt reduction to maintain its financial metrics at levels that are acceptable for the current ratings.

DBRS Morningstar continues to view the sale of Westcoast’s BCFS business as moderately positive for the Company’s business risk profile as it eliminated volume risk associated with its fee-for-service contracts. Following completion of the BCFS sale, Westcoast’s natural gas pipeline operations primarily consists of the B.C. Pipeline and the M&NP Canada natural gas pipeline systems under full cost-of-service (COS) 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 Morningstar), an Ontario Energy Board (OEB)-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 (Union Gas, previously wholly owned by Westcoast) with Enbridge Gas Distribution Inc. to form EGI, Westcoast no longer owns a controlling interest in its natural gas distribution subsidiary. DBRS Morningstar 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 Morningstar notes that Westcoast’s earnings and cash flow are lower following the completion of the BCFS sale and the TSA expiries at M&NP Canada, although the negative impact on key credit metrics has been largely offset by the above-mentioned debt reduction. The Company’s liquidity position remains adequate.

DBRS Morningstar estimates that, in the first half of 2019 (H1 2019), approximately 60% of Westcoast’s cash flow was derived from EGI dividends. Following the BCFS sale closing and material decline in M&NP Canada cash flow, DBRS Morningstar 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.

DBRS Morningstar does not expect the Coronavirus Disease (COVID-19) to have a material impact on Westcoast’s financial profile given the regulated COS nature of its operations. While the credit profiles of some of the pipeline shippers have weakened, DBRS Morningstar notes the B.C. Pipeline’s strong competitive position within British Columbia, as evidenced by two major growth projects, totaling $1.5 billion, that are currently under construction with anticipated in-service dates in H2 2021.

Over the medium term, DBRS Morningstar 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 Morningstar’s expectations on a sustained basis or potentially if EGI dividends are substantially lowered on a sustained basis.

ESG Considerations
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577