DBRS Limited (DBRS Morningstar) confirmed the rating on the Medium-Term Notes & Unsecured Debentures 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 Morningstar), and a supportive regulatory framework that allows the Company to recover costs and earn an adequate return on its investment base over a reasonable time frame.
NGTL’s earnings are regulated by the Canada Energy Regulator (CER), formerly the National Energy Board, 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. On May 25, 2020, the CER approved interim rates based on the 2020–24 Revenue Requirement Settlement (the Settlement) while the Settlement itself remains subject to CER approval. The Settlement provides an allowed ROE of 10.1% on deemed common equity of 40.0%; fixed annual operating, maintenance, and administration (OM&A) costs that are determined annually ($233 million in 2020), based on a pre-agreed formula including an adjustment for inflation; and an incentive mechanism for the sharing of variances between actual and projected OM&A costs. The Settlement is subject to a review if actual tolls exceed pre-determined levels. While the Settlement may be terminated subsequent to the settlement review process, the allowed ROE and deemed equity will continue until the end of the Settlement period. In March 2020, the CER also approved a tolling methodology for the North Montney Mainline Project.
NGTL’s investment base is set to grow as the NGTL System expands to accommodate the growing production in the Montney, Deep Basin, and Duvernay resource plays in the Western Canadian Sedimentary Basin (WCSB). NGTL placed $1.3 billion of projects into service in 2019 and has announced medium-term plans to develop approximately $10.0 billion of commercially secured expansion and maintenance projects. NGTL plans to place $3.3 billion of new facilities in service during 2020. Subject to regulatory approvals, the remaining projects are expected to be completed and placed in service over the medium term (2021 to 2023+).
NGTL's financial profile has improved over the last 12 months primarily because of a capital contribution of $2.5 billion from TCPL in 2019. DBRS Morningstar does not expect the Coronavirus Disease (COVID-19) pandemic to have a material impact on the Company's earnings in 2020 given the support from the regulatory framework. While credit profiles of some of the shippers on the NGTL system have weakened, the majority of NGTL revenues are from large creditworthy entities and the Company has access to financial assurances and regulatory protection. However, DBRS Morningstar notes that a sustained reduction in commodity prices could have an impact on NGTL's longer-term expansion projects.
NGTL’s elevated capital expenditure (capex) program ($2.9 billion in 2019) over the next three years is expected to be funded largely with debt from its parent, TCPL. While earnings and cash flows are expected to improve as projects are completed and placed in service, NGTL’s cash flow-to-debt ratio is expected to be pressured in the medium term due to the large capex program. DBRS Morningstar expects TCPL to continue to provide financial, liquidity, and operational support to NGTL. Any rating action is likely to be driven by a change in the credit profile of TCPL.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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