Morningstar DBRS Confirms Westcoast Energy Inc. at A (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Westcoast Energy Inc.'s (Westcoast or the Company) Issuer Rating and Senior Unsecured Notes rating at A (low), both with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect the regulated cost-of-service (COS) nature of the Company's natural gas pipeline operations and the benefits of owning a material investment in a strong, regulated natural gas distribution franchise. The ratings are supported by credit metrics at levels that are acceptable for the current ratings. The Company's liquidity position remains adequate.

The regulatory environment at B.C. Pipeline and Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada) was relatively unchanged in 2023. B.C. Pipeline is currently operating under the Canada Energy Regulator (CER)-approved five-year settlement agreement through 2026 and M&NP Canada's 2024-25 settlement agreement was approved by the CER in February 2024. While the Ontario Energy Board's (OEB) final order on Enbridge Gas Inc.'s (EGI; rated "A" with a Stable trend by Morningstar DBRS) latest rate application included certain adverse decisions, in Morningstar DBRS' opinion, EGI's rate base would continue to grow and the impact on financial metrics would be manageable for the medium term.

Medium- to long-term growth is expected to come from two major growth projects that are expected to receive regulatory approval in 2024 and achieve in-service dates in 2026 (the $1.2 billion T-North Expansion) and in 2028 (the $4.0 billion T-South Expansion), respectively, in support of liquefied natural gas exports from the west coast of Canada to Asian markets. Morningstar DBRS expects funding for the projects to be provided by Westcoast's ultimate parent, Enbridge Inc. (ENB; rated BBB (high), Under Review with Developing Implications by Morningstar DBRS).

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given the Company's relatively stable business and financial risk profiles. Although unlikely, the credit rating could be downgraded because of adverse regulatory changes or if Westcoast's credit metrics weaken substantially below Morningstar DBRS' expectations on a sustained basis.

EARNINGS OUTLOOK
In the near term, Morningstar DBRS expects Westcoast's standalone earnings to be relatively stable. Medium- to long-term growth is expected to come from expansion of the T-North and T-South sections of the B.C. Pipeline.

FINANCIAL OUTLOOK
Morningstar DBRS expects Westcoast's standalone operating cashflow to be relatively stable as the Company generates most of its operating cash flow from the B.C. Pipeline operating under a COS framework. However, the impact of growth projects on operating cashflow is expected to be fully realized from 2027.

Capital expenditure (capex) in 2024 is expected to be higher relative to 2023 because of a ramp up in growth capex starting related to the $1.2 billion T-North Expansion and the $4.0 billion T-South Expansion, both subject to regulatory approval. Consequently, Morningstar DBRS expects Westcoast to generate a free-cash-flow deficit starting in 2024 (expected to be funded by ENB), which will pressure the cash flow-to-debt ratio during the construction phase of the projects. Nevertheless, Morningstar DBRS views Westcoast's financial profile as acceptable and believes that the direct ownership of B.C. Pipeline, together with the equity investment in EGI, is more than adequate to support Westcoast's outstanding debt.

CREDIT RATING RATIONALE
Westcoast's natural gas pipeline operations include the wholly owned B.C. Pipeline and the 78%-owned M&NP Canada natural gas pipeline systems under full COS regulation with no associated commodity or volume risk. Westcoast also benefits from its 46% equity ownership of EGI, an OEB regulated natural gas distribution, storage, and transmission franchise in Ontario that generates relatively low-risk, stable earnings and cash flow. Morningstar DBRS evaluates Westcoast's pipeline operations on a standalone basis and adds the benefits of its EGI ownership through an overlay to determine the Company's ratings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Westcoast, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Westcoast, the following FRA factors listed in the Pipeline and Midstream Energy Industry are considered more important: Cash flow-to-debt and EBIT Interest Coverage.

(C) Weighting of the BRA and the FRA
In the analysis of Westcoast, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431181/global-methodology-for-rating-companies-in-the-pipeline-and-midstream-energy-industry

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (April 15,2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024)
https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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

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

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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