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

DBRS Limited (DBRS) 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.

NGTL’s earnings are regulated by the National Energy Board (NEB) and are 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 June 2018, the NEB approved NGTL’s 2018-2019 Revenue Requirement Settlement Application (2018 RSA). The 2018 RSA structure is largely similar to the previous 2016-2017 Revenue Requirement Settlement Application 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 2018 RSA and actual costs are to accrue to both NGTL and the shippers equally. 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 (WCSB), connecting most of the natural gas processing plants in Western Canada to domestic and export markets. Despite the rapid growth of production in the Appalachian Basin which has displaced significant western Canadian production from their traditional markets, production in the WCSB continues to grow as it is one of the lowest supply cost plays in North America. NGTL’s investment base is set to grow as the NGTL System expands to accommodate growing production in the WCSB. NGTL has announced medium-term plans to develop approximately $7.3 billion of commercially secured expansion projects. Key expansion projects include the North Montney Mainline Project ($1.4 billion) which was recommended for approval by the NEB in May 2018; an expansion program to connect production from the Montney, Duvernay and Deep Basin plays to the NGTL System ($2.0 billion); and an expansion program to expand export capacity at the interconnection with the Canadian Mainline ($2.4 billion). The Company’s large and growing investment base supports its financial profile. NGTL currently has regulatory approval for approximately $2.8 billion of projects and plans to place $1.2 billion of new facilities in service during 2018. 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 cashflow-to-debt and debt-to-capital ratios are expected to be pressured in the medium term (as at the last 12 months ended March 31, 2018, cash flow-to-debt was 9.7% and debt-to-capital was 78.9%) as the Company funds part of its large capital expenditures program with debt from its parent, TCPL; however, DBRS expects the metrics to improve gradually over the next three years 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 and operational support to NGTL.

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

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

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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