DBRS Confirms Alliance Pipeline Limited Partnership at A (low) and BBB (high)

DBRS has today confirmed the Issuer Rating of Alliance Pipeline Limited Partnership (Alliance Canada or the Partnership) at A (low), as well as Alliance Canada’s Senior Secured Notes and Senior Unsecured Notes at A (low) and BBB (high), respectively. All trends are Stable. Alliance Canada is the Canadian portion of the Alliance Pipeline System (collectively, Alliance), which includes Alliance Pipeline L.P., the U.S. portion.

The confirmation reflects DBRS’s view that Alliance Canada has maintained a stable credit profile, as it continued to be supported by good credit metrics and the 15-year take-or-pay shipper contracts servicing the amortization amount of the debt and interest throughout the contract term. Shipper contracts cover 100% of Alliance’s pipeline base capacity (1.325 billion cubic feet per day (bcf/d)) and are with strong credit profile shippers, with 89% of the shippers (the Canadian portion of the system) having investment-grade ratings. Under the contracts, Alliance Canada has no exposure to volume risk, is allowed to pass through prudently incurred operating costs and earns a reasonable return on its investment base. The contracts have consistently generated strong cash flow, which has been more than sufficient to service interest and amortized debt payment, with a debt service coverage ratio (DSCR) consistently near 2.0 times (x).

The confirmation factors in DBRS’s concern about uncertainties surrounding the renewal of shipper contracts when they expire on December 1, 2015. 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 in that: (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 nearly 20% over its base capacity, which could help to generate additional cash flow following the shipper contract expiration; and (3) a considerable amount of debt will be retired by the end of the shipper contracts.

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 the creditworthiness of Alliance USA could affect the credit profile of Alliance Canada, and vice versa.

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