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

DBRS has today confirmed the both Issuer Rating and Senior Unsecured Notes rating of Veresen Inc. (Veresen or the Company) at BBB (high). The Preferred Shares are confirmed at Pfd-3 (high). All trends are Stable. The confirmation reflects (1) relatively stable cash distributions from the Company’s regulated Pipeline businesses, which accounted for approximately 49% of Veresen’s 2012 cash distributions received from its subsidiaries and investments; (2) improved cash flow diversification as result of the acquisition of the Hythe/Steeprock complex (the Acquisition) from Encana Corporation (rated BBB); and (3) solid cash flow-interest coverage and cash flow-to-debt metrics (non-consolidated). The confirmation is also based on DBRS’s expectation that the currently high debt leverage (as a result of the Acquisition) at the parent level will improve over the medium term.

Veresen’s ratings are supported by strong and growing cash distributions from a diverse portfolio of investments. The mix of this portfolio has changed greatly over the past few years, as the Company has reduced its reliance on cash distributions from the Pipeline business, mostly its investment in Alliance Pipeline Limited Partnership (50%) and Alliance L.P. (50%) (collectively, Alliance; rated A (low)). The Pipeline business, which is self-financed and its’ debt is non-recourse, was supported by take-or-pay contracts that provide cash flow stability. Although Alliance faces contract renewal uncertainty in December 2015, DBRS believes that the cost-competitive Alliance System should continue to generate good cash flow beyond 2015. The growing Midstream business (gas gathering, processing and extraction of natural gas liquids; 42% of 2012 cash distributions) entails more volatile earnings than the Pipeline business, due to its exposure to commodity prices; however, this risk is mitigated by fee-for-service and long-term contracts at Aux Sable and a firm contract at the Hythe/Steeprock complex. In addition, all power generation (9% of cash contributions) is under contract, with some volume risk protection.

As a result of the Acquisition ($920 million), the parent debt increased significantly in 2012. The non-consolidated debt-to-capital ratio increased to over 40% in 2012 from 35.7% in 2011, which is viewed as aggressive. DBRS recognizes that Veresen benefits from owning a large non-debt and diverse asset base, which allows the Veresen to carry more non-consolidated debt than a pure holding company.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions) (November 2012), Rating Holding Companies and Their Subsidiaries (September 2012) and Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies