DBRS Confirms Alliance Pipeline Notes at A (low)

DBRS has today confirmed the ratings on the Senior Secured Notes of Alliance Pipeline Limited Partnership (Alliance Canada) and Alliance Pipeline L.P. (Alliance U.S.) at A (low), both with Stable trends. Alliance Canada is the Canadian portion of the Alliance Pipeline System (collectively, Alliance), and Alliance U.S. is the U.S. portion. Alliance continues to report stable earnings and cash flow, underpinned by long-term take-or-pay contracts on a negotiated cost-of-service basis that cover 98.5% of the pipeline’s base capacity, with mostly investment-grade shippers. The latter represents approximately 89% of commitments. An additional 3% of the base capacity is covered by security in the form of deposits or letters of credit, with the balance of 8% considered creditworthy (although not rated by DBRS).

Alliance’s rating of A (low) reflects the strength of the shipper group, which mostly has strong investment-grade ratings, and the continuing importance of the pipeline system that operates on a competitive basis beyond the contract term expiring in 2015. Full re-contracting is not required for either Alliance Canada or Alliance U.S. to meet their respective debt obligations. Further, the pipeline is able to ship rich natural gas (gas plus liquids in one pipeline under high pressure) out of western Canada to the Chicago market, compared to the competing pipeline system, which can ship only dry gas. This benefits shippers as they can ship natural gas liquids at the same toll.

DBRS expects throughput volumes to continue to exceed base capacity by close to 20%, similar to the average of the previous five years, which enhances Alliance’s competitive tolls to Chicago as shippers only pay incremental fuel costs on these authorized overrun services. Alliance Canada completed the northeast British Columbia expansion (BC Expansion) in December 2008, adding receipt only service capacity of 150 mmcf/d. With no major expansions planned in the near- to medium-term, Alliance’s cash flow should remain sufficient to cover small-scale expansions and amortizing debt repayments, with the balance used for distributions to its two 50/50 owners.

Additional liquidity is provided by respective five-year extendible credit facilities for Alliance Canada ($200 million, expandable to $300 million) and Alliance U.S. ($125 million, expandable to $200 million), both expiring June 2012, which are also available for issuing letters of credit to cover debt-service reserve requirements. In 2006, Calpine Energy Services Canada Partnership (CESCA) repudiated its firm transportation agreement (1.5% of contracted volumes) with Alliance, reducing long-term contracted capacity to 98.5% from 100%. Alliance incurred no financial loss by drawing on the supporting letter of credit and arranging for a replacement shipper to the end of March 2010. It also received a $12.1 million CESCA settlement in Canada and USD 8.5 million in the United States in the first half of 2008. After March 2010, Alliance will continue to re-market this capacity.

Alliance faces limiting factors to its credit rating, which are considered manageable. About 8% of the contracted commitments are with non-investment-grade shippers with no security support, although this group is considered creditworthy based on their financial strength and the essential service Alliance is providing to these shippers to sustain their respective operations. Furthermore, the shippers’ contracts have a 15-year primary term to 2015, compared with the 25-year amortization period for the pipeline for rate-making purposes. Rate incentives exist for contract renewals for Alliance U.S. While this is absent from the Canadian contracts, Alliance Canada, as an integral part of the pipeline system, should similarly benefit from the incentives.

Long-term prospects are driven by Alliance’s relatively low-cost expansions, pending northern gas developments expected beyond the middle of the next decade. Near-term opportunities, such as the BC Expansion (completed under the $33.7 million budget) to meet rising shipper demand, could open up prospects for other similar expansions for Alliance Canada in the Horn River and Montney shale gas basins. As for Alliance U.S., the proposed connection to the Pecan Pipeline in the Bakken fields of North Dakota ultimately could open up prospects for other similar expansions. A ten-year contract for 80 mmcf/d (with 40 mmcf/d for the first year) has been signed with Pecan Pipeline (North Dakota), a wholly-owned subsidiary of EOG Resources, with start-up expected in Q4 2009. Ongoing incremental growth is expected from optimizing projects to improve operational efficiencies and reliability. Longer-term projects include the potential construction of additional interstate natural gas pipelines servicing new supply and delivery areas, principally the Rockies Alliance Pipeline proposed in March 2008 with a memorandum of understanding signed with Questar Overthurst Pipeline Company (Questar). The project is currently delayed as a result of the financial market conditions and a drilling slowdown due to low gas prices. DBRS expects that as some of Alliance’s primary term shipper contracts expire in 2015, Alliance will transition to be less of a bullet pipeline, and evolve more into a mature pipeline system, providing greater services, connection points and feeder pipeline systems.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate rating.