Morningstar DBRS Confirms NGTL Limited Partnership at BBB (high) With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on the Issuer Rating and the Medium-Term Notes & Unsecured Debentures issued by NGTL Limited Partnership (NGTL or the Company) at BBB (high) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The NGTL System is operating under a five-year revenue requirement settlement approved by the Canada Energy Regulator (CER) for the years 2020 to 2024 (the Settlement). The Settlement is cost-of-service based and provides for an allowed return on equity (ROE) of 10.1% on deemed common equity of 40.0%. Costs are passed through in tolls charged to the shippers on a flow-through basis, and tolls generally include a return on capital invested in the assets or rate base as well as recovery of the rate base over time through depreciation. The terms of the Settlement include an incentive mechanism for sharing cost savings or excess costs with customers for certain operating costs and the opportunity to increase depreciation rates if tolls fall below specified levels. In August 2024, TC Energy Corporation announced that it had received unanimous support from its customers for a new five-year revenue requirement settlement (New Settlement) commencing on January 1, 2025. The New Settlement maintains the ROE and deemed common equity at existing levels while providing for increased deprecation rates and incentive mechanisms, which are expected to improve earnings and cash flow. The New Settlement is subject to final approval from the CER.

The Company's investment base continues to grow as the NGTL System expands to accommodate the growing natural gas supply in northeast British Columbia and northwest Alberta, intra-basin demand, and connections to export delivery points. However, the capital program over the next three years (2024-26) is relatively smaller compared with the last three years (2021-23), when the Company embarked on a demand-backed expansion program. The Company's capital program consists of approximately $2.6 billion of secured projects, spanning 2024 to 2026. NGTL expects to fund the capital program with a combination of operating cash flow and borrowing from TransCanada Pipelines Limited (TCPL; rated BBB (high), Stable by Morningstar DBRS). NGTL placed $2.0 billion of capacity projects in service in 2023.

In July 2024, TCPL announced that it has signed an equity interest purchase agreement (Agreement) with an Indigenous-owned investment partnership for a minority equity interest of 5.34 percent in the NGTL System and the Foothills Pipeline assets for a gross purchase price of $1 billion. Morningstar DBRS views the Agreement beneficial from a Social perspective as it makes communities close to the NGTL System assets economic stakeholders in NGTL. While TCPL's stake post close of the transaction is modestly lower, NGTL continues to be a strategic and key asset for TCPL, and Morningstar DBRS expects TCPL to continue to provide NGTL with strong support.

CREDIT RATING DRIVERS
The credit ratings are based on the assumption of implicit support from TCPL. Consequently, a positive credit rating action at TCPL would result in a corresponding positive credit rating action at NGTL.

EARNINGS OUTLOOK
Morningstar DBRS expects NGTL's earnings to improve in 2024 because of continued growth in the investment base.

FINANCIAL OUTLOOK
NGTL's capital program for construction of new facilities is primarily underpinned by long-term contracts. Capital expenditure is expected to be approximately $0.8 billion in 2024. Morningstar DBRS expects TCPL to continue to support the Company with its financing needs.

CREDIT RATING RATIONALE
The NGTL system is a material and integral part of TCPL's natural gas infrastructure and connects natural gas production from the Western Canadian Sedimentary Basin to both domestic and international markets, including via TCPL's other pipelines. The NGTL system is also critical to TCPL's Canadian Mainline and for new pipeline connectivity to exports through the Coastal GasLink pipeline project, and contributed approximately 20% to TCPL's 2023 comparable EBITDA. Based on an operating agreement, TCPL provides all administrative and operating services necessary to operate the NGTL facilities as well as project development and logistics support to NGTL's expansion plans. Approximately 96% of NGTL's total outstanding debt is due to TCPL. It is TCPL's strategic intention to continue providing financial support to NGTL by borrowing more efficiently at the corporate level. Consequently, Morningstar DBRS assumes strong implicit support from TCPL to NGTL.

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 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.

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

Morningstar DBRS applied the following principal methodology:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

The following criteria has also been applied:
-- 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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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