DBRS Morningstar Confirms Ratings on TriSummit Utilities Inc. at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed TriSummit Utilities Inc.’s (TSU or the Company; formerly AltaGas Canada Inc.) Issuer Rating and Unsecured Medium-Term Notes rating at BBB (high) with Stable trends. The rating confirmations reflect TSU’s stable business risk profile underpinned by its ownership of regulated natural gas distribution utilities, diversified asset base, and support from largely unsubordinated cash flows generated at its regulated utilities and contracted renewable power assets. Key challenges include the Company’s relatively small size, operational risks at its regulated utilities, exposure to contracted but unregulated renewable power operations, and the impact of weather on natural gas consumption and electricity generation.

The regulatory environment at TSU’s regulated utilities—including Pacific Northern Gas Ltd. (PNG), Heritage Gas Limited (HGL), and Apex Utilities Inc. (AUI; formerly AltaGas Utilities Inc.)—remained relatively stable over the last year with no changes in deemed equity or return on equity (ROE) parameters. In October 2020, the British Columbia Utilities Commission (BCUC) approved PNG’s latest revenue requirement application (RRA) for the two-year period ending in 2021. The approval from BCUC included an increase in rates to cover pipeline integrity management activities, information technology project costs, and full recovery of the shared corporate service costs that TSU allocated for its services to PNG. In prior RRAs, PNG only sought and received approval to recover a portion of the shared corporate service costs in rates. DBRS Morningstar expects the full recovery of shared corporate service costs to allow actual ROE at PNG to trend closer to approved ROE. DBRS Morningstar expects that energy export projects from Western Canada will accelerate PNG’s growth in rate base. In 2020, PNG executed long-term contracts for a significant portion of its spare transmission capacity to facilitate natural gas deliveries to upcoming energy export projects. In April 2020, the Nova Scotia Utility and Review Board (NSUARB) accepted HGL’s request to extend the Customer Retention Program’s term until December 2023; this order improved natural gas’ competitive position compared with other fuel sources in HGL’s service territory. On the other hand, the Alberta Utilities Commission (AUC) rejected AUI’s application for its Etzikom lateral replacement project in October 2020; this decision does not materially affect TSU’s overall capital expenditures (capex) outlook.

The Coronavirus Disease (COVID-19) pandemic has not had any material impact on the Company at Q3 2020. On May 28, 2020, the AUC approved AUI’s application to establish a deferral account for deferred bill payments related to the coronavirus. In June 2020, the BCUC approved PNG’s request to establish a deferral account to capture unplanned costs and savings related to the pandemic. In March 2020, the NSUARB allowed HGL to provide some discretionary temporary relief to customers affected by the pandemic.

TSU’s financial performance has remained relatively stable, underscoring the regulated and contractual nature of its earnings. DBRS Morningstar expects the Company’s operating cash flow (OCF) to increase because of the growth in rate base. DBRS Morningstar also expects TSU to fund its capex and dividend payments with OCF and debt to maintain the regulatory capital structure at the utilities. The Stable trends reflect DBRS Morningstar’s expectation that the Company’s key credit metrics will improve modestly and remain supportive of the current ratings. DBRS Morningstar anticipates that TSU will continue to be the primary debt issuer with no material external debt at the operating companies.

Given that the Company’s size constrains its rating, a positive rating action would require a material improvement in scale. While unlikely, an adverse change in the regulatory environment could lead to a negative rating action.

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.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), 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.

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@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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