DBRS Confirms Alliance Pipeline Notes at A (low), Stable Trends

DBRS has today confirmed the ratings on the Senior Secured Notes and Senior Unsecured Notes of Alliance Pipeline Limited Partnership (Alliance Canada) at A (low) and BBB (high), respectively, and the Senior Secured Notes of Alliance Pipeline L.P. (Alliance U.S.) at A (low), all 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 take-or-pay contracts on a negotiated cost-of-service basis that cover virtually all of the pipeline’s base capacity.

The rating confirmation reflects the strength of the shippers, most of which have strong investment-grade ratings (for about 88% of the commitments), and the continuing importance of the pipeline system that operates on a competitive basis beyond the contract term expiring in 2015. While uncertainties exist during the contract renewal period scheduled in December 2010, full re-contracting is not required for either Alliance Canada or Alliance U.S. to meet their respective debt obligations. In addition, Alliance is able to ship liquids rich natural gas (gas plus liquids in one pipeline under high pressure) under one toll, enhancing netbacks, compared to the competing pipeline system, which can ship only dry gas. The pipeline also offers extra capacity (at the 21% level for the last few years) beyond the base level, which enhances its competitive tolls as shippers only pay incremental fuel costs on these overrun services.

DBRS expects that as some of Alliance’s primary term shipper contracts expire in 2015, it will evolve more into a mature conventional pipeline system (and less of a bullet pipeline), providing greater services, connection points and feeder pipeline systems, such as the northeast British Columbia expansion (BC Expansion) in 2008 and the connection to the Pecan Pipeline (Pecan Interconnect) in early 2010 to reach the rich gas basins. The former has added receipt-only service capacity of 150 mmcf/d, and the latter 80 mmcf/d (40 mmcf/d in the first year) on a ten-year contract with a shipper considered investment grade. Given no major expansions planned in the near- to medium-term, DBRS expects Alliance’s cash flow to be more than sufficient to cover minor expansions and amortizing debt repayments, with the balance used for distributions to its two 50/50 owners. For Alliance Canada, additional liquidity is provided by a five-year extendible credit facility ($200 million, expandable to $300 million), expiring in June 2012, which is also available for issuing letters of credit to cover debt service reserve requirements. It also issued $120 million unsecured medium-term notes in December 2009 with proceeds partly used to repay bank borrowings. Similarly for Alliance U.S., a five-year extendible credit facility ($125 million, expandable to $200 million) expiring in June 2012, is available.

There are limiting factors, which are considered manageable. Refinancing risk exists as the 15-year primary term of the shippers’ contracts expires in 2015, whereas most debt maturities come due from 2015 to 2025 in line with the 25-year amortization period for the pipeline for rate-making purposes. With the exception of the recent senior unsecured notes mentioned above for Alliance Canada, all other senior notes are amortizing. About $1.0 billion of debt will remain outstanding in 2015 for Alliance Canada, whereas the pipeline’s economic value should far exceed the estimated book value of approximately $1.5 billion. For Alliance U.S., about $440 million of debt will remain outstanding in 2015 versus the estimated book value of approximately $950 million. While about 8% of the contracted commitments are with non-investment-grade shippers with no security support, this group is considered creditworthy based on its financial strength and the essential service Alliance is providing to sustain its respective operations.

Near-term opportunities exist to capitalize on the strength of Alliance to attract new sources of liquids rich gas, which could be processed at the Aux Sable extraction plant (Aux Sable) located near the end point of the pipeline close to Chicago. Aux Sable is jointly majority owned by Alliance’s two partners. Potential expansions in shale gas/oil basins, such as, Montney and North Dakota, are likely in the next couple of years, similar to the BC Expansion and the Pecan Interconnect. 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 Overthrust 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. Long-term prospects include northern gas developments expected later in the decade, driven by Alliance’s relatively low-cost expansions.

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 our website under Methodologies.