DBRS Confirms NOVA Gas at “A”, Stable Trend

DBRS has today confirmed the rating of NOVA Gas Transmission Ltd. (NGTL or the Company) at “A” with a Stable trend. The confirmation is based on NGTL’s strong credit profile and stable operations, as well as the credit strength and implicit support of its parent, TransCanada PipeLines Limited (TCPL – see separate press release), which has provided financing to NGTL since its merger with TCPL in 1998. DBRS expects NGTL to repay debt as it matures, or to refinance with intercompany borrowings. The ratings of TCPL (“A” and R-1 (low)) have been concurrently confirmed, based on TCPL’s continued stable earnings and cash flow from its regulated pipelines, mostly on a cost-of-service basis, and its contracted or low-cost base-load power volumes. Furthermore, substantial growth prospects exist, underpinned by long-term contracts on project completion.

NGTL owns the Alberta System, which forms an integral part of TCPL’s pipeline systems, and accounted for approximately 18% of TCPL’s consolidated EBITDA for the first six months of 2010 (6M 2010). Despite its expansion programs, estimated at $1.6 billion from 2009 to 2012 ($440 million expected in 2010), its share of TCPL’s EBITDA may decline slightly going forward, attributable to TCPL’s substantial capex program, such as Keystone Pipeline and the restart of Units 1 and 2 of Bruce Power in the near to medium term. NGTL remains a major natural gas transporter in western Canada, shipping about two-thirds of the region’s output. Profitability in terms of return on equity (ROE) has improved through expansions in the last few years, and should benefit further from a three-year settlement NGTL reached with the shippers in June 2010, resulting in a higher ROE of 9.70% on deemed equity of 40% (8.75% ROE on 35% equity in 2009) on a cost-of-service basis. The new settlement is retroactive to January 1, 2010 on receipt of regulatory approval (expected in Q3 2010). Over 60% of total capex (estimated $1.0 billion) was invested in the North Central Corridor (NCC) expansion, completed in stages in 2009 and June 2010, which has raised NGTL’s investment base, providing growth prospects in the near to medium term.

NCC is composed of a 300-kilometre natural gas pipeline and associated facilities connecting the northwest and northeast portions of the Alberta System. The Company expects NCC to reduce fuel consumption on the entire Alberta System by approximately 50%, resulting in shipper savings of between $50 million and $75 million per year, thereby enhancing the Alberta System’s competitive position. This should partly offset the substantial rate hike on TCPL’s connecting Mainline System instituted in 2010 due to falling throughput volumes.

Following the National Energy Board’s approval in April 2009, the Alberta System operates under federal oversight, which allows TCPL to provide integrated services by extending the pipeline across provincial borders, providing potential customers (for instance, in British Columbia and the Northwest Territories) with direct connection to the network. Apart from the NCC, further expansion programs include the 77 km Groundbirch Pipeline, connecting the Montney shale gas region in northeastern BC (NEBC) to the Alberta System (estimated cost of $200 million) with 1.1 bcf/d of shipping commitments by 2014 and in service expected in Q4 2010. In May 2009, NGTL also filed a project description with the NEB to construct the 155 km Horn River natural gas pipeline, extending the Alberta System to the Horn River shale gas region in NEBC. The pipeline is expected to start up in Q2 2012 (at an estimated project cost of $310 million), with commitments of 540 mmcf/d by 2014. All these expansions will increase the Alberta System’s throughput and receipt point flexibility, enhancing the netbacks of the shippers.

The Company faces certain limiting factors, including continued de-contracting, natural gas supply risk and cost pressure caused by competition from Alliance Pipeline and Vector Pipeline. However, NGTL’s tolls are determined on a cost-of-service basis, resulting in protection from short-term throughput risk and a stable financial profile. Throughput volumes should be helped by the potential rise in unconventional gas production in the Alberta Foothills and NEBC, the areas for which NGTL’s expansion projects are targeted.

Given the investment in the NCC and future plans in British Columbia, DBRS expects the Company’s cash flow-to-total debt to remain lower in the near to medium term (0.14 times in the last twelve months ended June 30, 2010 (LTM)) as debt levels increase through intercompany loans from TCPL. Furthermore, LTM EBIT/interest coverage fell slightly under two times (1.99 times). However, given the 40% equity thickness recently negotiated with the shippers, DBRS expects debt-to-capital (65% at June 30, 2010) to gradually decline to the 60% level, once the expansion programs are complete by 2012. Long-term prospects are supported by northern gas developments that should result in northern gas supplies being connected to the Alberta System, expected by the end of next decade. TCPL has an optional ownership interest in the Mackenzie Gas Pipeline and Alaska Pipeline projects. An open season on the latter was concluded in July 2010, together with Mobil Exxon Corporation.

Note:
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.