DBRS Morningstar Confirms NOVA Gas Transmission Ltd. at A (low) with a Stable Trend

DBRS Limited (DBRS Morningstar) 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 Morningstar), 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.

On August 17, 2020, the Canada Energy Regulator approved NGTL's 2020–24 Revenue Requirement Settlement (the Settlement). The Settlement provides an allowed ROE of 10.1% on deemed common equity of 40.0%; fixed annual operating, maintenance, and administration (OM&A) costs that are determined annually ($244 million in 2021) based on a pre-agreed formula, including an adjustment for inflation; and an incentive mechanism for the sharing of variances between actual and projected OM&A costs. The Settlement is subject to a review if actual tolls exceed pre-determined levels. While the Settlement may be terminated subsequent to the settlement review process, the allowed ROE and deemed equity will continue until the end of the Settlement period.

The Coronavirus Disease (COVID-19) pandemic did not have a material impact on NGTL's earnings in 2020 as the regulatory framework insulates NGTL from changes in throughput volumes and commodity prices. While the credit profiles of some of the shippers on the NGTL System have weakened, the majority of NGTL revenues are from large creditworthy entities and the Company has access to financial assurances and regulatory protection. While permitting delays as a result of the pandemic has resulted in a slowdown in construction activities, DBRS Morningstar does not expect the pandemic to have a material impact on NGTL's earnings in 2021.

NGTL’s investment base is set to grow as the NGTL System expands to accommodate the growing production in the Montney, Deep Basin, and Duvernay resource plays in the Western Canadian Sedimentary Basin. NGTL placed $3.4 billion of projects into service in 2020 and has announced medium-term plans to develop approximately $7.1 billion of commercially secured expansion and maintenance projects. NGTL plans to place $1.2 billion of new facilities in service during 2021. Subject to regulatory approvals, the remaining projects are expected to be completed and placed in service over the medium term (2021 to 2024+).

NGTL's financial profile has improved over the last 12 months, primarily because of continued growth in the Company’s investment base. While earnings and cash flows are expected to improve as projects are completed and placed in service, NGTL’s cash flow-to-debt ratio is expected to be pressured in the medium term due to the large capital expenditure program (2021: $2.9 billion) over the next three years, which is expected to be funded largely with debt from its parent, TCPL. DBRS Morningstar expects TCPL to continue to provide financial, liquidity, and operational support to NGTL. A rating action is likely to be driven by a change in the credit profile of TCPL.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020, https://www.dbrsmorningstar.com/research/370267) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021, https://www.dbrsmorningstar.com/research/379424) which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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].

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