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 the following considerations:

(1) EGI maintained a stable business risk profile, as it is in the fourth year of the five-year price-cap incentive regulations (IR) ending at the end of 2023. The IR framework for EGI has been stable and DBRS Morningstar does not expect any material changes during this IR period.

(2) EGI's financial performance remained solid, with improved credit metrics for the 12 months ended June 30, 2022. Furthermore, DBRS Morningstar expects that the credit metrics will improve modestly over the medium term as a result of rate base growth and synergy realization (see below).

(3) EGI's liquidity remained solid despite a significant increase in the Purchase Gas Variance Account (PGVA), which captures the difference between actual and forecasted natural gas prices. As of June 30, 2022, the PGVA balance was $780 million. The recovery of the PGVA balance was approved by the Ontario Energy Board. However, the recovery period extends to 24 months, instead of 12 months, to mitigate impact on customers. At the end of June 2022, approximately $380 million of EGI's $2.0 billion credit facility was available. In August 2022, EGI issued $650 million in long-term debt, which was partially used to pay down its short-term indebtedness and improved its liquidity considerably. DBRS Morningstar expects that, as in the past, in the event that EGI requires more liquidity to finance its natural gas inventory for the winter distribution, its parent, Enbridge Inc. (rated BBB (high), Stable trend by DBRS Morningstar) will step in and provide temporary liquidity.

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 since the amalgamation of Enbridge Gas Distribution Inc. (EGD) with Union Gas Limited in 2019, and DBRS Morningstar expects significant synergy to be achieved through 2023. EGI’s reliability and the flexibility of its natural gas supply have improved significantly, compared with standalone EGD, as a result of the addition of Union Gas’ storage facilities. The ratings incorporate EGI’s exposure to volume risk and the regulatory lag in the recovery of natural gas costs when the price of natural gas increases substantially.

Although EGI will likely generate substantial free cash flow deficits over the next few years because of its major capital projects (which DBRS Morningstar estimates to be between $1.4 billion and $1.5 billion for new projects and system upgrades) and high dividend payout ratio, funding of cash flow deficits has been with new debt and equity injection from the parent. DBRS Morningstar expects EGI to continue to fund its future capital expenditures (capex) 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 that would have a negative impact on EGI’s business risk profile, or (2) a significant deterioration of EGI's credit metrics on a sustained basis that would no longer support the current rating. DBRS Morningstar considers these scenarios unlikely.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The methodologies are Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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].

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