DBRS Upgrades Senior Unsecured Notes Rating of Inter Pipeline (Corridor) Inc. to “A” with Trend Changed to Stable; Commercial Paper Confirmed at R-1 (low) with a Stable Trend

DBRS has today upgraded the rating on the Senior Unsecured Debentures of Inter Pipeline (Corridor) Inc. (Corridor) to “A” from A (low) and changed the trend to Stable from Positive. DBRS has concurrently confirmed Corridor’s Commercial Paper rating at R-1 (low) with a Stable trend.

The upgrade of the long-term debt rating reflects DBRS’s expectation that Corridor’s upcoming debt re-financing requirements (see below) will be addressed in a satisfactory manner and that Corridor’s $1.8 billion expansion project will be completed on schedule and on budget in late 2010. Upon expansion completion, but in any event no later than January 1, 2011, construction costs will be added to the rate base and Corridor will begin to receive incremental revenue. Corridor’s rate base is expected to more than triple relative to the existing level, resulting in a similar increase in earnings in the first full year following expansion completion, adjusted for the impact of changes in allowed return on equity (ROE). Inter Pipeline Fund (IPF; concurrently being upgraded to BBB (high) with a Stable trend (see separate press release) has estimated that it expects incremental EBITDA of $145 million per year from Corridor upon expansion commencement.

As of March 31, 2010, all major pipeline and pump station facilities were successfully installed, with 44% of line fill requirements delivered into the system. Line fill and commissioning activities will continue through late 2010. The risk of significant cost overruns has been eliminated and Corridor has no capital risk on remaining cost components, including line fill and interest expense during construction, which will be added to Corridor’s rate base at their actual cost.

Also underpinning the upgrade are the following factors:

(1) IPF has positioned its balance sheet and liquidity position to accommodate the required $450 million equity injection into Corridor, expected in late 2010. Upon expansion completion, IPF, which acquired Corridor on June 15, 2007, will be required to make the equity contribution in order to repay advances under the two “recourse to IPF” tranches of Corridor’s revolving credit facility.

While IPF’s consolidated credit ratios have been weakened by the ongoing Corridor expansion, the Corridor debt (other than the equity contribution portion) is non-recourse to IPF, mitigating the impact on IPF’s financial profile. IPF has issued equity over time (including net issuance of $144 million in December 2007 and $166 million in June 2009, and a regular and premium dividend reinvestment plan (DRIP) that raised an additional net $100 million through March 31, 2010) in order to partly offset the negative impact of the Corridor expansion on IPF’s credit metrics. Additionally, IPF has maintained its cash distribution to cash flow ratio in the high-60% range. These factors have allowed IPF to maintain sufficient availability under its credit facility to fund the equity injection upon expansion commencement.

(2) In August 2012, the two “non-recourse to IPF” tranches of Corridor’s revolving credit facility (combined total availability of $1.654 billion) come due. DBRS expects that Corridor will re-finance a majority portion of these amounts with long-term debt well in advance of the maturity date, with the balance to be funded on an ongoing basis by a scaled-back commercial paper (CP) program that is 100% backstopped by committed credit facilities.

(3) Corridor owns the Corridor Pipeline System, which provides a vital link for the transportation of bitumen and diluent between two major components of the Athabasca Oil Sands Project (AOSP): the Muskeg River Mine, north of Fort McMurray, Alberta, and the Scotford Upgrader adjacent to Shell Canada Energy’s (Shell Canada) Scotford Refinery, near Edmonton. DBRS believes that the shippers’ large commitment to the very substantial AOSP expansion ($14.3 billion projected cost) ensures that the shippers have a strong incentive to support Corridor.

(4) Corridor is supported by a long-term cost-of-service firm service agreement (FSA) with quality shippers, which are also the AOSP sponsors: (a) Shell Canada provides 60% of the commitments, guaranteed by Shell Petroleum N.V. (SPNV), which has a private long-term rating in the AA range by DBRS. DBRS notes that the guarantee may be revoked under certain circumstances, although that is highly unlikely to occur. (b) Chevron Canada (guaranteed by its parent, Chevron Corporation (Chevron; rated AA by DBRS) and (c) Marathon Oil Canada Corporation (Marathon Canada), a subsidiary of Marathon Oil Corporation (Marathon), each account for 20% of the commitments.

Corridor faces other challenges, not addressed above, that are considered manageable:

(1) Theoretically, the weighted-average credit rating of the shipper group could be significantly weakened through the addition of lower-rated third-party shippers to Corridor for future expansions. However, DBRS expects that the importance of AOSP to the current sponsors/shippers and the importance of Corridor to the success of AOSP would compel the current sponsors/shippers to take actions to cure any default by a lower-rated third-party shipper. DBRS notes that there are currently no plans to add third-party shippers.

(2) Corridor’s earnings are sensitive to changes in interest rates, which affect its allowed ROE and credit metrics. Given the current low interest rate environment, Corridor’s allowed ROE is relatively low compared with other similarly-regulated pipelines and utilities in Canada.

The Corridor expansion is expected to increase diluted bitumen (dilbit) throughput capacity from approximately 300,000 barrels per day (b/d) at present, to 465,000 b/d in the late 2010 to accommodate AOSP’s Expansion 1, expected to be completed in late 2010 or early 2011. Completion of subsequent phases, with much more modest capital requirements, would result in up to 1.4 million b/d of total dilbit capacity and provide an opportunity for third-party shippers or producers to utilize spare capacity on the Corridor Pipeline System.

Finally, DBRS notes that the Corridor ratings incorporate DBRS’s review of financial information, expansion project plans and other relevant information that is not disclosed in this press release due to the private nature of the Company.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on the DBRS website under Methodologies.

This is a Corporate (Energy) rating.