DBRS Confirms NOVA Gas Transmission Ltd. at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the rating on the Medium-Term Notes & Unsecured Debentures (the Notes) issued by NOVA Gas Transmission Ltd. (NGTL or the Company) at A (low) with a Stable trend. The rating primarily reflects the strong financial and liquidity support from NGTL’s parent, TransCanada PipeLines Limited (TCPL; rated A (low) with a Stable trend by DBRS), and the Company’s growing regulated investment base, which provides stable and predictable earnings. On June 9, 2017, DBRS confirmed the ratings of TCPL and removed them from Under Review with Developing Implications (see the DBRS press release from June 9, 2017, titled “DBRS Confirms Ratings of TransCanada Corporation and Subsidiaries”) where they were placed on March 17, 2016, subsequent to the announcement of the intent to acquire Columbia Pipeline Group, Inc. (CPG). Concurrently, DBRS confirmed the rating on the Notes issued by NGTL. The rating action followed the announcement by TransCanada Corporation (rated Pfd-2 (low) with a Stable trend by DBRS) that it had closed the previously announced asset sales to finance the CPG acquisition and used the proceeds to repay the outstanding balance on the USD 6.9 billion CPG acquisition bridge facility.

NGTL’s earnings are regulated by the National Energy Board (NEB) and is based on cost recovery plus a return on equity (ROE) framework. Consequently, NGTL’s earnings are not exposed to short-term fluctuations in the price of natural gas or changes in throughput volumes or contracted capacity levels, providing the Company with predictable cash flows. In April 2016, the NEB approved the NGTL System’s 2016–2017 Revenue Requirement Settlement Application (RSA). The 2016 Settlement structure is similar to the previous 2015 Settlement’s, with fixed annual operating, maintenance and administration (OM&A) costs; allowed ROE of 10.1%; and deemed common equity of 40.0%. Any variance between fixed OM&A costs in the RSA and actual costs accrue to both NGTL and shippers on a sliding scale. DBRS notes that the current regulatory model is supportive and provides the Company with a transparent framework to recover costs and earn an adequate return on its investment base over a reasonable time frame.

The NGTL System is the major natural gas gathering and transportation system for the Western Canadian Sedimentary Basin, connecting most of the natural gas processing plants in Western Canada to domestic and export markets. The Company’s large and growing investment base supports its strong financial profile. NGTL’s investment base is set to grow, as the Company has announced medium-term plans to develop approximately $9.0 billion of commercially secured expansion projects. The projects include the North Montney Mainline ($1.4 billion); the Saddle West Expansion ($0.6 billion); the 2016–2017 Facilities ($2.2 billion); the 2018 Facilities ($0.6 billion); the Merrick Mainline Pipeline ($1.9 billion); the recently announced expansion program to connect production from Montney, Duvernay and Deep Basin to the NGTL System ($2.0 billion); and other new supply-and-demand facilities ($0.3 billion). NGTL currently has regulatory approval for $2.0 billion of projects and plans to place in service $1.6 billion of new facilities in 2017. The remaining projects, subject to regulatory approvals, are expected to be completed and placed in service over the medium term (2018 to 2021).

NGTL’s credit metrics are expected to be pressured in the medium term (as at the last 12 months ended March 31, 2016, debt-to-capital was 77.2% and cash flow-to-debt was 10.8%) because of the high planned capital expenditures; however, DBRS expects the metrics to improve as these largely contracted projects are completed and placed in service, providing NGTL with incremental earnings and cash flows. DBRS also expects TCPL to continue to provide financial support to NGTL.

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 principal methodology is Rating Companies in the Pipeline and Diversified Energy Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.