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 at 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 final year of the five-year price-cap incentive regulations (IR) ending at YE2023. 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 strong credit metrics for the trailing 12 months ended June 30, 2023. Furthermore, DBRS Morningstar expects the credit metrics to improve modestly over the medium term as a result of rate base growth.

(3) EGI's liquidity remained solid despite a significantly large amount in the Purchase Gas Variance Account (PGVA) (although reduced in 2023), which captures the difference between actual and forecast natural gas prices. As of June 30, 2023, the PGVA balance was $337 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. In August 2022, the Company's liquidity improved considerably as EGI issued $650 million in long-term debt, which was partially used to paydown the Company's short-term indebtedness. 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), Under Review with Developing Implications by DBRS Morningstar), will step in and provide temporary liquidity.

The Company’s credit ratings are supported by a stable regulatory framework in Ontario and a very large and economically strong base of approximately 3.9 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. The Company had good synergy in the past three years from the amalgamation of Enbridge Gas Distribution Inc. (EGD) with Union Gas Limited (Union Gas), and DBRS Morningstar expects EGI to achieve significant synergy through 2023. EGI’s reliability and the flexibility of its natural gas supply have improved significantly, compared with stand-alone EGD, as a result of the significant addition of Union Gas’ storage facilities. The credit 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.

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 $1.7 billion and $1.8 billion for new projects and system upgrades). The Company has funded cash flow deficits with new debt it issued and equity injections 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 Ontario Energy Board (OEB) approved capital structure, which is currently 64% debt and 36% equity for 2023. 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 credit rating actions in the near term. However, it could take a negative credit 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 credit ratings. DBRS Morningstar considers these scenarios unlikely.

ENVIRONMENTAL, SOCIAL, AND 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodologies:

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

-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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