DBRS Confirms Westcoast Energy Inc. at A (low), Pfd-2 (low) and R-1 (low), Stable

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The rating actions incorporate DBRS’s expectation that Westcoast’s significant capex program (projected to be $1.2 billion in 2012, including only $426 million spent through June 30, 2012, and likely to remain elevated in the medium term), will result in negative free cash flows and pressure its credit ratios, as incremental financing will likely come from increased long-term debt issuance.

While the Company’s capex program is substantial, the spending is allocated to low-risk transmission, gathering and processing projects, which will continue to support its relatively strong business risk profile. Westcoast derived virtually all of its segment EBIT from low-risk, mostly regulated operations in the six months ending June 30, 2012, up from 87% to 89% in 2009–2011 and 79% in 2008, with the balance largely subject to commodity price and fractionation spread risk at Empress NGL Marketing. DBRS believes that the Company’s low-risk operations will benefit over the medium to long term from strong exploration and drilling activity in Westcoast’s key areas, given the Company’s plan to bring approximately $1.7 billion in growth projects with long-term contractual commitments into service in stages through 2013, supporting a high component of low-risk EBIT for the Company.

The Company’s financial profile remains relatively strong despite rising capex related to its medium-term growth program. Increasing earnings and cash flow from expansions placed in service to date have resulted in relatively strong credit ratios. Westcoast should generate sufficient cash flow to meet a significant portion of its capex and dividend payments going forward, with manageable funding needs at both Union Gas Limited and the Company. Westcoast’s consolidated credit metrics will likely continued to be pressured over the medium term as a result of its significant growth capex, although the metrics are underpinned by Westcoast’s mostly low-risk and regulated operations and will likely remain within the parameters of the current ratings.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.