Financial Integrity of Oil and Gas Pipeline Companies
While energy markets have recently been volatile, returns on pipeline assets are impacted by tolls regulation and often supported by long-term contracts,Footnote 66 which reduces short-term volatility. Tolls, the prices that pipelines charge for their transportation services, and overall revenues, are often more related to specific pipeline costs than market conditions.
Tolls are generally designed to allow pipeline companies to recover capital and operating costs, service debt, and provide a return to their investors. Financial integrity of pipeline companies is important for maintaining their pipelines, attracting capital to build new infrastructure, and meeting the market’s evolving needs.
The following sections review and discuss factors relevant to the pipeline transportation system’s financial integrity. Figure 30 displays various financial metrics for each major pipeline company.Footnote 67
Source and Description
Source: CER – REGDOCS
Description: This chart displays financial information on four distinct metrics for each CER-regulated pipeline company; deemed equity ratio, actual return on equity, rate base, and revenue.
- Deemed equity ratio: Deemed equity ratios for major pipeline companies range from 40% to 50% since 2016. Prior to 2016, Alliance Pipeline had a deemed equity ratio of 30%.
- Actual return on equity: Actual ROEs are shown, with most pipelines having ROEs of approximately 10%, with the main outliers being Alliance Pipeline, which has very high actual ROEs since 2016 as well as Trans-Northern Pipeline, which had a very low (negative)Footnote 68 actual ROE in 2017.
- Revenue: Revenues for pipeline companies vary significantly. Since 2016, Enbridge Canadian Mainline has had the highest revenues, followed by the NGTL System, and the TC Canadian Mainline.
- Rate base or net plant in service: The rate bases for major pipeline companies vary significantly, with the largest changes since 2015 being a decline in TC Canadian Mainline’s rate base and a rise in the Enbridge Canadian Mainline and NGTL System rate bases. Enbridge Canadian Mainline has the largest net plant in service of any CER-regulated pipeline, with NGTL System second (rate based).
A common equity ratio is the percent of common equity in a company's capital structure.Footnote 69 This ratio is related to a company's financial risk, which is associated with a company's debt level. Holding other things constant, higher common equity ratios decrease financial risk by increasing the likelihood of a company being able to meet its financial obligations, including paying down their debt.
Deemed Common Equity Ratio
When the CER approves a Group 1 company's tolls under cost-of-service regulation, it often approves a rate of return on common equity (ROE) and a deemed common equity ratio. Parent companies of CER-regulated companies often have a variety of businesses consolidated into one capital structure, including non-regulated businesses. The Commission approves an appropriate common equity ratio only for the assets it regulates.Footnote 70
Alternatively, some Group 1 pipeline companies negotiate a comprehensive tolls settlement with their shippers that does not expressly identify a capital structure and return on equity.Footnote 71 In these cases, the CER considers approval of the overall settlement.
Where available, the deemed common equity ratios for CER Group 1 pipeline companies from 2015 to 2020 are shown below. Some of these deemed common equity ratios have been approved by the CER or NEB, while others (where no equity ratio has been approved) are as reported by the pipeline company in reporting their actual ROE. These deemed ratios have not changed over this period, other than for Alliance Pipeline, which increased its reported deemed equity ratio in 2016 from 30% to 40%.
Return on Equity
For CER-regulated pipeline companies, an allowed rate of return on equity is often determined through either a hearing process or negotiation. Actual ROEs earned by the pipeline companies may vary for numerous reasons such as throughput changes, incentives, profit-sharing, and changing costs.
Achieved ROEs for several CER-regulated pipeline companies are shown in Figure 30. Alliance Pipeline has seen the highest actual returns on equity since 2016 due to the high level of demand for its capacity and its at-risk tolling model that commenced in December 2015. Actual ROEs are filed with the CER for most Group 1 companies.
Other Financial Information
Rate base is generally the amount of capital investedFootnote 72 in the pipeline minus the accumulated depreciation. This is the amount on which CER-regulated pipeline companies are authorized to earn a return on. Some pipelines do not report rate base and instead report net plant in service, which is the original cost of fixed assets less associated accumulated depreciation.
Figure 30 shows the rate bases or net plant for various pipeline companies. Since 2015, Enbridge Pipelines Inc.Footnote 73 has seen the largest growth in net plant in service, expanding by nearly $4.5 billion, or 52%. Much of this is from the Canadian portion of the Line 3 Replacement Project.
For gas pipelines, the largest changes to rate base since 2015 have been on the NGTL System, which has increased nearly $6.5 billion, or 107%, as well as the Enbridge BC Pipeline which has grown by more than $1.6 billion, or 120%. At the same time, TC Canadian Mainline’s rate base decreased about $1 billion, or 23%, largely due to depreciation outpacing capital investment on the Western portion of the Mainline.
In 2020, the total amount of rate base or net plant in service for the major pipelines regulated by the CER was over $37.6 billion, an increase of approximately 39% percent since 2015.Footnote 74
Revenue is the income that pipeline companies earn from their operations, mainly via tolls collected from shippers. Therefore, revenue directly relates to toll levels, pipeline capacity, and actual utilization of that capacity.
Figure 30 shows annual revenues for various pipeline companies. The Enbridge Canadian Mainline has the largest total annual revenue at over $3.6 billion in 2020, mainly from increased utilization on Canada’s largest oil export pipeline as oil pipeline capacity out of the WCSB is constrained. Since 2015, the NGTL System, BC Pipeline, and Keystone Pipeline have all seen steady growth in revenue. TC Mainline has seen the largest decline in revenues since 2015, in part due to decreased long-haul flows of natural gas from western Canada to eastern Canada on the Northern Ontario Line, as well as decreased tolls.
In 2020, the total amount of annual revenues for the major pipelines regulated by the CER totaled about $10.0 billion, an increase of approximately 48% percent from 2015.Footnote 75
Financial risk is based on a company's level of debt and other fixed obligations. Financial risk increases as the proportion of debt and interest payments increase in relation to equity. A company's financial risk may be assessed using ratios such as interest coverage, fixed-charges coverage, and cash flow-to-total debt and equivalents. Credit rating agencies often use these financial ratios as part of their ongoing monitoring of credit risk and rating process. Credit risk, one form of financial risk, is the risk to a lender that a borrowing company’s cash flows will not be sufficient to make its debt payment.
Financial risk differs from business risk, which is based on the nature of a particular business activity and, for pipelines, typically includes supply, market, regulatory, competitive, and operation risks.
Credit ratings assess the probability that a debt issuer will meet its obligations and indicate the financial integrity of the rated company. The rating is based on a credit rating agency’s view of the company’s capacity to borrow and ability to meet its financial commitments on a timely basis. To assess creditworthiness, rating agencies focus on risks to the lender of not receiving principal and interest on time on the specific debt instrument. Rating agencies also compare an issuer’s level of risk with the risks of similar issuers or debt securities (its peer group). External factors including industry and country-level trends that could impact a company’s cash flows and ability to meet its obligations are also considered.Footnote 76
While the main factors that are considered when evaluating credit risk vary from industry to industry, some of the common factors are core profitability, asset quality, strategy and management strength, and the profile of financial and business risk. For pipeline companies, these can also include regulatory factors, competitive environment, energy supply and demand, and regulated versus non-regulated activities.
In Canada, pipeline company credit ratingsFootnote 77 are generally determined by three credit rating agencies: DBRS Morningstar,Footnote 78 S&P, and Moody's. Credit ratings are considered either investment grade, or non-investment grade. Non-investment grade ratings indicate a higher probability that the company will be unable to repay its debt obligations and is deemed to be speculative. Investment grade companies tend to be larger companies with stable or growing cash flows, often from having long-term contracts underpinning its services.
Appendix B compares the rating scales for the three rating agencies. Appendix B also includes the credit rating history for each of the major pipeline companies by agency, including the credit rating agency’s rationale for each company credit rating change between 2015 and 2020.
Figure 31 shows the credit ratings for the major pipeline companies.
Source and Description
Source: CER Pipeline Profiles, Moody’s, S&P, DBRS Morningstar websites.
Description: The chart shows each major pipeline company’s credit ratings by agency for each of the past several years.
Use CTRL+click to select multiple companies & rating agencies.
Source and Description
Source: CER - Pipeline Profiles, and Moody’s, S&P, DBRS Morningstar websites.
Description: The chart shows the history of a chosen pipeline company’s credit ratings by agency. See Appendix B for details on each rating change since 2015.
Investment and Other Corporate Trends
Corporate Ownership and Name Changes
Many of the large CER-regulated pipeline companies are owned by two publicly traded companies, Enbridge Inc. (Enbridge) and TC Energy Corporation (TC Energy). Enbridge is the ultimate parent company of these CER-regulated pipelines: Enbridge Pipelines Inc., Enbridge Pipelines (NW) Inc., Enbridge Southern Lights GP Inc. (on behalf of Enbridge Southern Lights LP), Express Pipeline Ltd., Enbridge Bakken Pipeline Company Inc. (on behalf of Enbridge Bakken Pipeline Limited Partnership), and Westcoast Energy Inc, carrying on business as Spectra Energy Transmission. Enbridge also indirectly owns 77.53% of Maritimes & Northeast Pipeline Management Ltd. and 50% of Alliance Pipeline Ltd. TC Energy is the ultimate parent company of these CER-regulated pipelines: Foothills Pipe Lines Ltd., NOVA Gas Transmission Ltd., TransCanada PipeLines Limited, and TransCanada Keystone Pipeline GP Ltd. TC Energy also indirectly owns 50% of Trans Québec and Maritimes Pipeline Inc.
In May 2020, TEML Westpur Pipelines Limited changed its name to Kingston Midstream Westspur Limited and continues to be regulated by the CER under the status of a Group 2 company. The parent company Tundra Energy Marketing Limited rebranded as Kingston Midstream in 2019. TEML acquired these assets from an Enbridge affiliate in December 2016.
Effective May 2019, TransCanada Corporation changed its name to TC Energy Corporation to better reflect the scope of its North American operations.
In December 2019, Pembina Pipeline Corporation acquired Kinder Morgan Canada Limited, including assets such as the Cochin Pipeline. The company that owns Cochin Pipeline has been renamed to PKM Cochin ULC from Kinder Morgan Cochin ULC and remains regulated by the CER. This transaction followed the August 2018 acquisition of Trans Mountain Corporation, the owner of the Trans Mountain Pipeline, from Kinder Morgan by a wholly owned subsidiary of the Canada Development Investment Corporation (a Government of Canada Crown corporation).
Effective November 2018, Enbridge acquired the remaining 80.099% stake it did not already own in Enbridge Income Fund Holdings Inc. At the same time, Enbridge also acquired the remaining stakes it did not already own in Spectra Energy Partners LP, Enbridge Energy Partners LP, and Enbridge Energy Management LLC.
Effective February 2017, Enbridge completed its merger with Spectra Energy Corp. As a result, a number of CER-regulated pipelines became partly or wholly owned by subsidiaries of Enbridge, including Express Pipeline, M&NP Pipeline, and Enbridge BC Pipeline.
Both TC Energy and Enbridge have issued common equity shares since early 2016. TC Energy issued more than $9 billion in common shares while Enbridge (and affiliate Enbridge Income Fund Holdings Inc. which is now part of Enbridge) issued nearly $4 billion in common shares since early 2016.
Both TC Energy and Enbridge have been active in corporate debt markets since early 2016, with each company issuing more than $20 billion in corporate debt.Footnote 79
Enbridge and TC Energy also have issued preferred shares, in excess of $1 billion each.
In March 2020, the Government of Alberta announced it made a $1.5 billion equity investment in TC Energy’s Keystone XL project, and committed to provide up to a $6 billion loan guarantee in 2021.Footnote 80
Environmental, Social, and Governance Considerations
Environmental, social, and governance (ESG) metrics are a way to look at nonfinancial risks that are considered material to stakeholders. As social pressure increases for the global economy to transition to low carbon energy, countries and investors are pledging to align the flow of capital with the goals of the 2015 Paris Agreement. By using ESG metrics, investors can measure how companies in all sectors of the economy operate in a way that harmonizes sustainability and financial goals. Studies show firms who focus on ESG are more likely to be better managed, which leads to lower costs, improved community relations, and fewer litigations while also being more resilient to external risks.Footnote 81Footnote 82
For pipeline companies, an effective ESG strategy may improve their social license to operate, which can reduce project delays, create a competitive advantage, and potentially attract more investors.Footnote 83 CER-regulated companies are becoming more focused on improving ESG reporting, and are working to develop higher-quality disclosure. While the CER does not require ESG reporting as part of its regulatory oversight, ESG-related issues such as environmental protection, consultation with Indigenous groups and stakeholders, and safety and security of pipeline operations are paramount to the CER and are deeply imbedded throughout the CER Act, the CER’s regulations, and the CER’s work and culture.
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