DBRS Confirms Veresen Inc. at BBB (high) and Pfd-3 (high), Stable Trends

DBRS has today confirmed the Senior Unsecured Notes and the Preferred Shares of Veresen Inc. (Veresen or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects (1) relatively stable cash flow from the Company’s regulated pipeline businesses, which accounted for approximately 56% of Veresen’s 2011 cash distributions received from its subsidiaries; (2) diversification benefits from its midstream (35% of cash distributions) and power generation businesses (9% of cash distributions), supported by long-term contracts with mostly investment-grade counterparts; and (3) solid non-consolidated cash flow ratios – albeit high non-consolidated leverage – at the parent level following the closing of the $920 million acquisition of the Hythe/Steeprock complex (the Acquisition) from Encana Corporation (Encana) in February 2012, which DBRS viewed as a credit neutral event for Veresen.

The business risk profile of Veresen has changed materially over the past few years, as the Company has shifted away from its traditional pipeline business, mostly its investment in Alliance Pipeline Limited Partnership (50%) and Alliance L.P. (50%) (collectively, Alliance) toward natural gas gathering and processing and power generation businesses. Cash flow in the midstream and power generation businesses are considered to be more volatile than that of the regulated pipelines. However, this business risk is significantly mitigated by fee-for-service and long-term contracts. In addition, the expansion has considerably reduced Veresen’s reliance on cash distributions from its pipeline business to service its debt, providing good diversification benefits. This is particularly critical to Veresen when Alliance faces a decline in earnings due to a depreciating investment base as well as uncertainty associated with contract renewals when the shipper contracts expire on December 1, 2015.

On a non-consolidated basis, the Company’s pro forma cash flow ratios remained strong. However, its debt-to-capital ratio (on a pro forma basis) increased to 38% (2010, 30%) following the Acquisition. This leverage level is viewed as high for a holding company. DBRS expects the Company to remain prudent in its future financing strategy to maintain its non-consolidated leverage below the 30% level.

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

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