DBRS Confirms Veresen at BBB (high), Stable

DBRS has today confirmed the Senior Unsecured Notes of Veresen Inc. (Veresen or the Company) at BBB (high) with a Stable trend. The confirmation reflects: (1) relatively stable earnings contributions from Veresen’s regulated pipeline businesses, which accounted for the majority of consolidated earnings (71% of total EBITDA in the first half of 2011 (H1 2011)); (2) diversification benefits from Veresen’s other business segments, supported by long-term contracts with mostly investment-grade counterparts; and (3) the Company’s strong overall financial profile.

Veresen continues to benefit from relatively stable operations and financial profile, largely underpinned by its 50% ownership in Alliance Pipeline Limited Partnership and Alliance Pipeline L.P. (collectively, Alliance, each rated A (low) by DBRS) supported by take-or-pay contracts to 2015 (except Pecan Pipeline, which has contracts to 2020). While uncertainties exist beyond the contract period (only 8% of contracted capacity has been elected to extend to December 2016 or later), Alliance is expected to continue to operate on a competitive basis and remain a major contributor to the earnings and cash flow of Veresen. Alliance should continue to become less of a bullet pipeline based on a single toll and instead evolve into a mature conventional pipeline system providing greater market-based services, including short-haul delivery and receipt points and hub and feeder pipeline systems.

This enhanced diversification is evidenced by (a) the acquisition of the Prairie Rose Pipeline and Stanley Condensate Recovery Plant in the Bakken region of North Dakota for US$185 million in July 2011 and (b) the recent announcement to connect Bakken natural gas production to Alliance through the 124-kilometre Tioga Lateral Pipeline (with an initial design capacity of approximately 120 million cubic feet per day (cf/d)). The combined throughput capacity represents approximately 14% of total Alliance throughput volumes (1.6 billion cf/d in H1 2011). Veresen’s Natural Gas Liquids (NGL) and Power segments also provide diversification. All segments are characterized by long-life assets mostly supported by long-term contracts.

Power (9% of total EBITDA in H1 2011) is expected to drive future growth through greenfield projects and acquisitions, as demonstrated by the purchase of a portfolio of run-of-river hydroelectric facilities in British Columbia (approximately $100 million) in February 2011 and the acquisition of all of the remaining outstanding shares (89%) of Pristine Power Inc. (Pristine) that the Company does not already own (approximately $300 million) in November 2010. The York Energy Centre, with a 400 MW natural gas-fired electricity generating facility, is expected to be commercially operational in Q2 2012 and contribute to earnings. DBRS expects the Company to maintain a reasonable financial profile for the rating category by funding material acquisitions with a prudent mix of debt and equity, as evidenced by the Pristine acquisition (62/38 debt/equity).

The NGL business (20% in H1 2011) at Aux Sable generates earnings and cash flow volatility due to its exposure to commodity prices. However, this is mitigated by its 20-year contract with a subsidiary of BP plc, which ensures a base level of earnings and the flow-through of all associated operating, maintenance and most capital costs. NGL is expected to continue to post strong operating earnings as a result of the continued robust market conditions, with high fractionation spreads in the foreseeable future.

Despite Veresen’s holding company status, the issue of structural subordination is largely mitigated by the stable base level of cash distributions received, which is more than sufficient to service the Company’s unconsolidated debt of around $500 million, including convertible/exchangeable debentures of about $86 million at June 30, 2011. All subsidiary/affiliate debt is non-recourse to Veresen and mostly amortizing, with each entity considered self-financing. Alliance, the largest cash contributor, has a regulated capital structure, ensuring stable cash distributions to Veresen, supported by contractual arrangements and competitive shipping rates. The Power segment is mostly supported by medium- to long-term contracts, which provide capacity payments for the California power plants and cost recovery for the Ontario facilities. East Windsor has a 20-year power purchase agreement with Ontario Power Authority (rated A (high)), which is capacity-based. Aux Sable provides certain base earnings through the contractual fixed fee payments. It also carries minimal debt.

The Company’s non-consolidated financial metrics are a more meaningful measure for its financial performance, given the proportional consolidation of Alliance and Aux Sable, and the full consolidation of East Windsor, despite the stand-alone nature of these businesses. On an unconsolidated basis, debt-to-capital remained relatively stable at 40% as at June 30, 2011 (up slightly from 39% as at December 31, 2010). While the unconsolidated debt ratio is expected to rise to the mid-40% range in the near future (as the Company intends to partly fund growth initiatives with debt at the corporate level), the leverage ratio is expected to remain within the rating category. Cash flow-to-debt at around 0.30 times for the last 12 months to June 30, 2011, was still strong relative to Veresen’s peers.

The Company has a good liquidity profile. In December 2010, Veresen established a new $450 million three-year committed syndicated revolving credit facility with an additional $100 million accordion feature. In February 2011, the Company set up a new $45 million three-year committed bilateral letter of credit facility. Aggregate drawings under both facilities were around $250 million as at June 30, 2011. In line with Veresen’s past practices, the existing bank debt, which is primarily used to fund growth initiatives, is expected to be replaced with term debt to improve liquidity.

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

The applicable methodologies are Rating North American Pipeline and Diversified Energy Companies, DBRS Preferred Share and Hybrid Criteria for Corporate Issuers, and Rating Parent/Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.