DBRS Confirms Iroquois Gas Transmission System, L.P. at BBB (high), Stable Trend

DBRS has today confirmed the Senior Unsecured Long-Term Notes rating of Iroquois Gas Transmission System, L.P. (Iroquois or the Partnership) at BBB (high) with a Stable trend. The rating confirmation reflects the Partnership’s stable earnings and cash flow on an enlarged asset base since 2008, improved credit metrics and its track record with growth projects as seen in the past three years. Iroquois also benefits from strong sponsorship and steady natural gas demand in the New England market. Earnings and cash flow are supported by longer-term firm service contracts with 38 shippers to at least 2011 to 2026 (weighted average remaining term of about 6.8 years), regardless of usage, that provide long-term stability. Of the contracted capacity, approximately 75% (72% in 2009) is with companies deemed investment-grade based on DBRS’s internal assessment (11% through parental guarantees). The remaining 18% of contracted capacity is secured by letters of credit or cash deposits, and 7% is considered creditworthy by Iroquois based on its internal credit review. It is also the only pipeline sourcing natural gas from Western Canada through TransCanada PipeLines Limited (TCPL – its ultimate 45% owner) that has direct access to New York City. It also has interconnections with three interstate pipelines, which provide about one-third of the natural gas consumed in the growing New England market. However, the Partnership’s operating results for the nine months ended September 30, 2010 (9M 2010) were negatively affected by the higher-priced Canadian gas supply as a result of low gas pices and the declining gas volumes from Western Canada as well as the sluggish economic recovery, which could persist, near term.

The Partnership has completed its expansion phase through the Market Access project (Market Access) in 2008 and all three phases of 08/09 expansions (08/09) in 2008 and 2009, adding 100 mmcf/d and 200 mmcf/d of capacity, respectively, through compression and related facilities. These two projects are contracted long-term with strong investment-grade shippers, improving the Partnership’s overall credit profile, with Consolidated Edison Company of New York, Inc. for Market Access, and KeySpan Gas East Corporation for 08/09.

Near-term growth is limited and interruptible revenues (typically representing a small percentage of total revenues) will likely decline over the next couple of years primarily due to the higher-priced Canadian gas supply as mentioned above and the sluggish economic conditions. For similar reasons, while firm contracts should remain at current levels, the average term of contracts could decline from the 6.8 year level on contract renewals. However, credit metrics at September 30, 2010 improved from the 2009 levels, with debt-to-capital of 49%, cash flow-to-debt of 0.29 times and EBITDA interest coverage of 5.16 times (55%, 0.25 times and 4.62 times in 2009), reflective of the contributions from the completed projects. Incremental improvements are expected over the medium term, given low sustaining capex and $170 million of amortizing debt. Distributions in the near term are expected to be guided by the Partnership’s liquidity needs and management’s target of 45% to 50% equity, or 50% to 55% debt-to-capital, which is consistent with the current credit rating parameters for a regulated pipeline supported by firm contracts. The Partnership’s liquidity remains adequate through its $10 million 364-day credit facility (currently undrawn) and no material debt maturities before 2019. It completed its refinancing through the issuance of $150 million of 10-year senior notes in April 2010. The proceeds therefrom together with free cash flow were used to repay $200 million in debt maturities. It raised $140 million debt in May 2009 for funding the two expansion projects mentioned above as well as to pay annual distributions to its partners which were withheld in 2008.

Potential challenges include competition from other pipelines for declining supply of natural gas from Western Canada, and increasing competition in the northeastern U.S. market. Further, due to excess pipeline capacity in the Western Canada Sedimentary Basin, the Partnership’s firm service contract term could decline over time, although this is partly mitigated by the $170 million amortizing debt ($120 million remaining amount at September 30, 2010) due in 2027 (amortization began in April 2008).

Longer-term opportunities include the NYMarc project to provide producers in the Marcellus shale access to Iroquois’ existing growth markets in New York City and Eastern Canada through interconnections with the Tennessee Gas Pipeline and Millennium Pipeline. This could entail supply of over 1 bcf/d of gas demand of the U.S. northeast markets. The Partnership also has an open season (results to be determined) on the Wright Transfer Compressor project in August 2010 to receive gas from the Tennessee Gas Pipeline, and if successful, could add up to 375,000 Dth/d of capacity, diversifying supply options for its shippers.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.