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.
The NGTL System is operating under a five-year revenue requirement settlement approved by the Canada Energy Regulator for the years 2020 to 2024 (the Settlement). The Settlement is cost-of-service based and provides for an allowed return on equity of 10.1% on deemed common equity of 40.0%. Costs are passed through in tolls charged to the shippers on a flow-through basis, and tolls generally include a return on capital invested in the assets or rate base as well as recovery of the rate base over time through depreciation. The terms of the Settlement include an incentive mechanism for sharing cost savings or excess costs with customers for certain operating costs and the opportunity to increase depreciation rates if tolls fall below specified levels.
The Company’s investment base continues to grow as the NGTL System expands to accommodate the growing natural gas supply in northeast British Columbia and northwest Alberta, intra-basin demand, and connections to export delivery points. The Company's capital program consists of approximately $6.6 billion of secured projects, largely spanning 2022 to 2024, including $1.0 billion of maintenance capital. NGTL expects to fund the capital program with a combination of operating cash flow and borrowing from TCPL. NGTL placed $1.1 billion of capacity projects in service in 2021. NGTL recently revised its capital expenditures budget for 2022 higher to $2.9 billion (from $2.7 billion anticipated in 2021) primarily because of inflationary cost pressures and additional regulatory conditions.
Although earnings and cash flows are expected to improve from the support of the growing investment base, the Company’s credit metrics are expected to remain weak over the next three years because of the higher debt financing required to fund the large capital program. Notwithstanding the weaker credit metrics, DBRS Morningstar expects TCPL to continue to provide financial, liquidity, and operational support to NGTL, and because of the strong implicit support from TCPL, a change in the credit rating of NGTL is likely to be triggered by a change in the credit rating of TCPL.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Rating actions on TCPL are likely to have an impact on NGTL’s rating. ESG factors that have a significant or relevant effect on the credit analysis of TCPL are discussed separately at https://www.dbrsmorningstar.com/research/398323/tc-energy-corporation-transcanada-pipelines-limited-rating-report.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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 firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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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