DBRS Confirms Alliance Pipeline Limited Partnership at A (low)

DBRS has today confirmed the Senior Secured Notes and Senior Unsecured Notes of Alliance Pipeline Limited Partnership (Alliance Canada or the Partnership) at A (low) and BBB (high), respectively, both with Stable trends. Alliance Canada is the Canadian portion of the Alliance Pipeline System (collectively, Alliance), which includes Alliance Pipeline L.P. (Alliance USA – see separate press release), the U.S. portion.

The rating is based on strong and predictable cash flow from take-or-pay shipper contracts (which end December 1, 2015) to service the amortization amount of the debt and interest throughout the contact term. Shipper contacts cover 100% of Alliance’s pipeline base capacity and are with strong credit profile shippers, with 89% of the shippers (the Canadian portion of the system) having investment-grade ratings. Although the renewal of new contracts beyond 2015 remains uncertain and future competition or economic conditions could force Alliance to realize lower earnings and cash flow than the current contracts (currently not expected), this risk is mitigated by: (1) the Alliance pipeline system (the System) remains relatively competitive from a cost perspective, which is expected to enhance its ability to obtain new contracts; (2) the System could run at 20% over its base capacity, which could help to generate additional cash flow; and (3) a considerable amount of debt will be retired by the end of the contracts.

Despite these strengths, Alliance Canada’s financing flexibility is limited by its high debt levels. The debt-to-capital ratio remained relatively high at 68.5% at the end of Q1 2012 (64% on a senior secured debt basis), and was close to the 70% maximum senior debt leverage level allowed in the covenant. As Alliance is seeking to become a more conventional pipeline, increases in capital expenditures are expected over the medium term (particularly on the U.S. portion) and could place pressure on the balance sheet. Furthermore, earnings have been impacted by a declining investment base, as the System is depreciating over time. Although DBRS assesses the credit quality of Alliance Canada on a standalone basis, due to cross-default provisions between Alliance Canada and Alliance USA, DBRS believes that a change in credit worthiness of Alliance USA could impact the credit profile of Alliance Canada and vice versa.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.