DBRS Morningstar Confirms Ratings on TriSummit Utilities Inc. at BBB (high), Stable Trends

DBRS, Inc. (DBRS Morningstar) confirmed TriSummit Utilities Inc.’s (TSU or the Company) Issuer Rating and Unsecured Medium-Term Notes rating at BBB (high) with Stable trends. The rating confirmations reflect TSU’s stable business risk profile underpinned by its ownership of regulated distribution utilities, diversified asset base, and support from largely unsubordinated cash flows generated at its regulated utilities and contracted renewable power assets. Key challenges include the Company’s relatively small size, operational risks at its regulated utilities, exposure to contracted but unregulated renewable power operations, and the impact of weather on natural gas consumption and electricity generation.

Effective May 25, 2022, the Company entered into a definitive agreement for one of its subsidiaries to acquire 100% of ENSTAR Natural Gas Company (ENSTAR), the Alaska Pipeline Company, the Norstar Pipeline Company, Inc., and a 65% indirect interest in Cook Inlet Natural Gas Storage Alaska, LLC (CINGSA) (collectively, the Alaska Utilities Business) from a subsidiary of AltaGas Ltd. (AltaGas), in an all-cash transaction (the Transaction) valued at approximately USD 800 million, subject to customary closing adjustments. The Transaction is not subject to any financing contingency and is expected to be funded by approximately USD 470 million of common equity through TSU's indirect shareholders and approximately USD 300 million of unsecured long-term debt, which is expected to be issued through TSU's newly formed and wholly owned U.S. subsidiaries. In addition, as at September 30, 2022, CINGSA had approximately USD 45 million (approximately USD 29 million proportionate share) of outstanding senior notes, which TSU expects to remain in place. The Transaction is expected to close no later than the first quarter of 2023.

The regulatory environment at TSU’s regulated utilities—including Pacific Northern Gas Ltd. (PNG), Eastward Energy Incorporated (EEI; formerly Heritage Gas Limited), and Apex Utilities Inc. (AUI; formerly AltaGas Utilities Inc.)—remained relatively stable over the last year with no changes in deemed equity or return on equity parameters. AUI is in the final year of the five-year Performance-Based Regulation (PBR) term. In the June 2021 decision issued by the Alberta Utilities Commission (AUC), Electricity Distribution and Natural Gas Distribution, the third term of the PBR will be effective in 2024.

DBRS Morningstar expects future growth to come from the Company's regulated business as all the capital expenditures (capex) will be spent on its regulated utilities. The majority of the capex is expected to be for planned system improvements at AUI and new growth opportunities at PNG arising from the development of liquefied natural gas export projects in Western Canada. The growth capital program at PNG includes projects such as the PNG Reactivation Project and the Salvus to Galloway Project. DBRS Morningstar notes that the PNG Reactivation Project received approval in November 2021. The expected capital cost of the project is $48 million, with an approved maximum budget of $89 million.

TSU’s financial performance has remained relatively stable, underscoring the regulated and contractual nature of its earnings. DBRS Morningstar expects the Company’s operating cash flow (OCF) to increase because of the growth in the rate base. DBRS Morningstar also expects TSU to fund its capex and dividend payments with OCF and debt while maintaining TSU’s capital structure close to the regulatory approved capital structures at its utilities. The Stable trends reflect DBRS Morningstar’s expectation that the Company’s key credit metrics will remain supportive of the current ratings. DBRS Morningstar anticipates that TSU will continue to be the primary debt issuer with no material external debt at the operating companies.

Given that the Company’s size constrains its rating, a positive rating action would require a material improvement in scale. However, DBRS Morningstar may take a negative rating action if there is a substantial deterioration in its credit metrics from its current level or there is a material change in the business risk profile because of (1) an unlikely adverse change in the regulatory environment and/or (2) an acquisition or disposition.

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 principal methodology is Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616), 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 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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