DBRS Confirms Gaz Métro inc. at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating, Senior Secured Notes rating and First Mortgage Bonds (FMB) rating of Gaz Métro inc. (GMi or the Company) at “A” as well as its Commercial Paper (CP) rating at R-1 (low). All trends are Stable. GMi’s ratings are based on the credit quality of Gaz Métro Limited Partnership (GMLP or the Partnership), which guarantees GMi’s FMB, Senior Secured Notes and a secured credit facility that supports the CP. GMi is the general partner of GMLP and serves as its financing entity.

The Partnership’s credit quality has remained relatively stable over the past year. GMLP’s diverse portfolio of low-risk regulated businesses, which account for more than 95% of consolidated earnings, has continued to provide predictable earnings and cash flow. There have been no material changes in any of the Partnership’s key regulatory parameters over the past three years. In May 2015, the Régie de l’énergie (the Régie) approved the authorized return on deemed equity (ROE) for 2016 and 2017 at 8.90% for GMLP’s flagship entity, Gaz Métro-QDA, which is unchanged from 2015. The Régie’s authorized ROE is in line with that of other comparable provinces (8.75% for British Columbia; currently 8.3% for Alberta, but will increase to 8.5% effective January 1, 2017; currently 9.19% for Ontario, but will decline to 8.78% effective January 1, 2017; 8.75% to 9.25% for Nova Scotia; and 8.5% for Newfoundland and Labrador). Gaz Métro-QDA has a proven track record of sustaining profitability in line with its regulatory return parameters. As for Green Mountain Power Corporation (GMP), GMLP’s electricity distribution utility subsidiary based in Vermont, the authorized ROE for the fiscal year ended September 30, 2016 (F2016) was reasonable at 9.44%. GMP’s operating performance has proved to be resilient. GMP’s actual ROE has closely tracked the approved ROE over the past five years. These two utilities combined are expected to continue to account for approximately 85% of the Partnership’s consolidated earnings. GMLP’s smaller gas distribution utility, Vermont Gas Systems, Inc. (VGS; less than 5% of total earnings), is exposed to construction-cost overrun risk. The capital budget of VGS’s major capital project, the Addison Natural Gas Project, has further increased to USD 165.6 million (from its revised F2015 estimate of USD 153.6 million and F2013 initial estimate of USD 86.6 million). As a result, the Partnership took a pre-tax impairment charge of $26.5 million for the nine months ended June 30, 2016. Negative earnings and cash flow effects from the project-cost overrun have been manageable within the current rating category.

The Partnership’s financial risk assessment has remained well within the current rating category. DBRS does not expect any significant change in GMLP’s financial risk profile over the next 12 months as its capital expenditure is expected to remain manageable.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

DBRS 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 info@dbrs.com.