DBRS Morningstar Confirms Enbridge Gas Inc. at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating of Enbridge Gas Inc. (EGI or the Company) at “A” and the Company’s Commercial Paper rating as R-1 (low). All trends are Stable. The rating confirmations reflect (1) EGI’s stable business risk profile as it is in the third year of the five-year price-cap incentive regulations (IR) lasting through 2023, and there are no expectations of any material changes during this period; (2) its relatively solid credit metrics and DBRS Morningstar’s expectation that the credit metrics will improve modestly over the medium term as a result of rate base growth and synergy realization; and (3) solid liquidity and low refinancing risk in the next few years.

The impact of the Coronavirus Disease (COVID-19) pandemic on EGI’s operations and financial performance during 2020 and year-to-date 2021 has been modest. DBRS Morningstar does not expect the coronavirus to have a material impact on EGI’s operational and financial performance because EGI operates critical infrastructure and continues to provide an essential service.

The Company’s ratings are supported by a stable regulatory framework in Ontario and a very large and economically strong base of approximately 3.8 million customers across the province—the largest in Canada and one of the largest in North America. This large customer base is one of the key factors allowing EGI to achieve operating efficiency under the price-cap IR. Good synergy was realized from the amalgamation of Enbridge Gas Distribution Inc. (EGD) with Union Gas Limited in 2019 and 2020, and DBRS Morningstar expects significant synergy to be achieved through 2023. EGI is allowed to keep 100% of the earnings up to 150 basis points in excess of the allowed return on equity. EGI’s reliability and the flexibility of its natural gas supply have improved significantly, compared with EGD, as a result of the addition of Union Gas’ storage facilities. The ratings incorporate EGI’s exposure to volume risk and the potential regulatory lag in the recovery of natural gas costs when the price of natural gas increases substantially.

A slight weakness in EGI’s key credit metrics for 2020 compared with 2019 was caused by the lower volume of natural gas consumption because of warmer weather conditions. However, EGI’s key credit metrics for 2020 and the last 12 months ended June 30, 2021, remained solid and were supportive of the current ratings. DBRS Morningstar expects EGI’s credit metrics to improve modestly over the medium term, reflecting operating efficiency (including synergy realization) and incremental cash flow from a growing rate base. Although EGI will likely generate substantial free cash flow deficits over the next few years because of its major capital projects, DBRS Morningstar expects EGI to fund its future capital expenditures (capex) and to manage its dividend policy in such a way that the capital structure will be maintained in line with the regulatory capital structure of 64% debt and 36% equity. As a result, DBRS Morningstar does not expect the financing of EGI’s capex to have a material impact on its credit metrics in the medium term.

DBRS Morningstar does not expect any positive rating actions in the near term. However, it could take a negative rating action should the following events occur: (1) an adverse regulatory change 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. DBRS Morningstar considers these scenarios unlikely.

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 Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020; https://www.dbrsmorningstar.com/research/368939) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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 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.

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

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