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 Senior Unsecured Notes rating at A (low) and its Preferred Shares rating at Pfd-2 (low), all with Stable trends.

DBRS Morningstar determines its ratings by evaluating the Company’s pipeline operations combined with the benefits of substantial dividends from an “A”-rated entity, as described below. The rating confirmations reflect the regulated, cost-of-service (COS) nature of the Company's natural gas pipeline operations and investment in a strong natural gas distribution franchise (described below), supported by improved credit metrics, at levels that are acceptable for the current ratings, in the last 12 months ended June 30, 2021, and that DBRS Morningstar expects to be maintained over the medium term. The Company’s liquidity position remains adequate.

Westcoast’s natural gas pipeline operations include the wholly owned B.C. Pipeline and the 78%-owned Maritimes & Northeast Pipeline Limited Partnership natural gas pipeline systems under 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-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 (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 evaluates Westcoast’s pipeline operations and adds the benefits of EGI ownership to determine the Company’s ratings.

DBRS Morningstar estimates that, in the first half of 2021, approximately 63% of Westcoast’s cash flow was derived from EGI dividends. Following placement into service of its $1.5 billion of growth projects in Q4 2021, DBRS Morningstar estimates that approximately two-thirds of Westcoast’s cash flow will be derived from EGI dividends. While EGI’s credit profile is expected to remain strong over the medium term, any substantial increase in capital expenditure at EGI could potentially result in a decrease in dividend payments to Westcoast and weaken the Company’s financial profile.

DBRS Morningstar does not expect the Coronavirus Disease (COVID-19) pandemic 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 Q4 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 19, 2020; https://www.dbrsmorningstar.com/research/370267) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165). Other applicable methodologies include the 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 did have 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 the 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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