DBRS Comments on Alliance Pipeline’s Proposed New Services and Tolls

DBRS notes that on October 11, 2012, Alliance Pipeline (Alliance) announced that it proposed a new suite of flexible services and competitive toll structure (the Proposal) to its current shippers and potential customers. From now and through the first quarter of 2013, Alliance expects to finalize its toll structure and will then obtain regulatory approvals both in Canada and the U.S. The Proposal, if finalized and approved, will take effect after the end of the current transportation contracts ending December 1, 2015.

DBRS believes that the Proposal could increase cash flow volatility for Alliance although the degree of the impact on its credit metrics, particularly on the debt-service-coverage ratio, would depend on how Alliance effectively manages the potential volume risk under the Proposal and the portion of firm contracts (as a percentage of total capacity) signed by the shippers. However, this risk is mitigated by the proposed floor toll in the Proposal.

The Proposal is designed to offer producers more flexibility than the current contracts. It also offers shippers cost-effective and predictable tolls.

Currently, Alliance pipeline system consists of the Canadian portion and the U.S. portion. Under the Proposal, the Canadian system will be split into two receipt zones and one transmission zone. The main features of the Proposal are as follows:

(1) Shippers would pay a fixed toll on the receipt zones and downstream of the receipt zones, and be offered the choice of either (a) a fixed transmission zone toll, or (b) the toll that varies with market basis (Index Base Rate or IBR), under which tolls are based on a floor rate plus an incremental basis share, which is the natural gas price differentials between Chicago and AECO.
(2) Shippers may sell their natural gas out of receipt zones into the Alliance Transfer Pool, a title transfer trading pool. There have been increased trading activities on Alliance’s pipeline systems by shippers, marketers and utilities. Alliance Transfer Pool is expected to provide more liquidity and gas price transparency for traders.
(3) The U.S. transmission service from the Canadian/U.S. border to the terminus of the system remains largely unchanged. Full path services will continue to be offered, but tolls may vary based on the length of contracts.
(4) Alliance is expected to seek contract length up to ten years with the minimum of three years for IBR contracts.

As mentioned above, the Proposal is expected to increase cash flow volatility to Alliance due to (1) the movement in the basis between Chicago and AECO, (2) the potential for a small proportion of firm capacity committed by the shippers and (3) the expected shorter contract length relative to the current contacts (15 years). Although the degree of the cash flow volatility is difficult to assess, DBRS expects this risk to be partially mitigated by the floor rate designed in the Proposal. In the worst-case scenario, DBRS currently expects that the floor rate in the Proposal and Alliance’s low-cost competitiveness will produce sufficient cash flow to maintain its credit metrics, including the debt-service-coverage ratio within DBRS’s A (low) rating range.

DBRS continues to monitor the development of the Proposal and will issue an assessment of the new contractual arrangements once they are finalized and approved.

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.