Morningstar DBRS Confirms Enbridge Gas Inc.'s Issuer Rating at "A," Stable Trend

DBRS Limited (Morningstar DBRS) confirmed Enbridge Gas Inc.'s (EGI or the Company) Issuer Rating and Senior Unsecured Notes credit rating at "A" and its Commercial Paper credit rating at R-1 (low). All trends are Stable. The confirmations reflect (1) EGI's stable natural gas distribution business, which operates under a reasonable regulatory environment overseen by the Ontario Energy Board (OEB); and (2) EGI's strong credit metrics and liquidity. The Stable trends reflect Morningstar DBRS' expectation that the Company will continue to generate predictable earnings and cash flow under the proposed 2024-28 rate-setting framework.

KEY CREDIT RATING CONSIDERATIONS
In December 2023, the OEB released its ruling on Phase 1 of EGI's rebasing application for the years 2024 to 2028. A notable ruling was to remove the 40-year revenue horizon utilized to determine the economic feasibility for new connections serving small-volume customers, highlighting concerns about the potential for new assets to become stranded because of a shift toward lower-carbon energy alternatives. In response to this ruling, the Ontario government intervened in May 2024, overturning the OEB's decision related to the revenue horizon.

While the OEB's decision and the subsequent government intervention reflect the complexities involved in energy regulation amid energy transition, they do not fundamentally alter Morningstar DBRS' view of the natural gas distribution industry in Ontario or other regions in Canada. Looking ahead, any subsequent clarifications from the OEB are likely to provide more regulatory certainties for EGI. Therefore, Morningstar DBRS believes EGI's business risk profile remains stable, 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. For a more detailed discussion of the impact of transition risk on regulated natural gas utilities, please refer to the commentary "Ready to Unplug the Gas? Not Too Fast, Says the Ontario Government" (February 26, 2024) at https://dbrs.morningstar.com/research/428613.

As part of the Phase 1 decision, the OEB also raised the equity thickness for 2024 to 38% from 36%, reduced the capital budget, and reduced the depreciation rate for certain asset classes. Overall, Morningstar DBRS does not expect these orders to have a material impact on EGI's credit metrics.

CREDIT RATING DRIVERS
Morningstar DBRS is unlikely to take a positive credit rating action in the medium term given the stability of the current business risk profile. A negative credit rating action is also unlikely, given the Company's large natural gas distribution operation that generates predictable and stable cash flows, but could occur if there were an adverse regulatory decision or if key credit metrics deteriorated to a level no longer commensurate with the current credit ratings (i.e., cash flow-to-debt below 10%).

EARNINGS OUTLOOK
EGI has benefitted from predicable and stable earnings from its sizable rate base. Morningstar DBRS expects the Company's earnings to remain stable in 2024, driven by higher rates approved for the year and continued rate-base growth while offset by expected lower volumes in 2024 because of warmer weather. In addition, since EGI's annual rate changes are expected to be based on a proposed price-cap formula, including operating efficiency, any materially unexpected increase in operating costs can have a negative impact on EGI's operating income.

FINANCIAL OUTLOOK
Morningstar DBRS expect the Company's credit metrics to remain stable, with cash flow-to-debt averaging around 13% over the medium term. Capital expenditures (capex) are projected to stay elevated, at approximately $1.5 billion annually in 2024 and 2025. Consequently, EGI will likely generate substantial free cash flow deficits over the next few years. However, these deficits are likely to decrease as the Company lowers its dividend payments. Additionally, Morningstar DBRS views EGI as having a strong liquidity position, with $2.3 billion in credit facilities available as of June 30, 2024, to manage lags in passing through commodity costs and capex needs.

CREDIT RATING RATIONALE
EGI's credit ratings reflect the strong credit quality of its low-risk regulated operations and its strong franchise area with a very large customer base, partly offset by potential regulatory lag. Additionally, the credit ratings are supported by solid credit metrics, which Morningstar DBRS expects to continue.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

(B) Weighting of FRA Factors
In the analysis of EGI, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of EGI, 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 Regulated Utility and Independent Power Producer Industries (June 27, 2024), https://dbrs.morningstar.com/research/435127.

Morningstar DBRS credit ratings may use of 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 Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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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