DBRS Confirms Gaz Métro inc. at “A” and R-1 (low), Stable Trends

DBRS has today confirmed the ratings of Gaz Métro inc.’s (GMi or the Company) Issuer Rating, First Mortgage Bonds (FMB) and Senior Secured Notes at “A” and its Commercial Paper (CP) at R-1 (low), all with Stable trends. The rating of GMi is based on the credit quality of Gaz Métro Limited Partnership (GMLP or the Partnership), which guarantees GMi’s FMBs and Senior Secured Notes, and a secured credit facility that supports the CP. GMi is the general partner of GMLP and serves as its financing entity. Funds raised by GMi are loaned to the Partnership on similar terms and conditions.

GMLP’s business risk is viewed as low as most of the Partnership’s consolidated earnings are generated from its relatively low-risk regulated energy distribution (86% of reported 2012 EBITDA) and regulated pipelines and storage business (11% of reported 2012 EBITDA), with the remaining earnings from the non-regulated business. DBRS views the exposure to non-regulated operations as manageable. The stability of GMLP’s regulated businesses is underpinned by a supportive regulatory regime in Québec, a reasonable regulatory framework in Vermont and contractual agreements in the pipeline operations. In addition, GMLP’s Québec gas distribution operations (Gaz Métro-QDA; 70% of reported 2012 EBITDA) faces no commodity price risk and its volume risk is mitigated by a revenue stabilization mechanism. DBRS recognizes that under the partnership agreement, GMLP must invest at least 90% of its assets on a non-consolidated basis in the regulated energy sector.

The Partnership’s key credit metrics, particularly the cash flow-to-debt ratio, declined in 2012 following the acquisition of Central Vermont Public Service Corporation (CVPS) in June 2012 (the Acquisition), as debt levels increased (the Acquisition was funded with 50% debt and 50% equity) and CVPS only contributed three months of earnings and cash flow. However, key credit metrics remained in line with the current rating category.

With the Acquisition, earnings and cash flow contributions from regulated businesses are expected to increase and the cash flow-to-debt ratio is expected to improve (14.2% for the 12 months ended March 31, 2013, versus 13% in 2012). Going forward, DBRS expects key credit metrics to remain commensurate with the “A” rating.

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 Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.