DBRS Updates Its Report on Veresen Inc.

DBRS has today updated its report on Veresen Inc. (Veresen or the Company). Veresen continues to pursue its growth and diversification initiatives. In May 2013, the Company filed an application with the Federal Energy Regulatory Commission (FERC) to construct and operate an LNG export facility and related power and pipeline infrastructure at Coos Bay, Oregon (Jordan Cove Energy Project, or the Project). The estimated cost of the Project is $7.5 billion, with an expected in-service date of 2018. DBRS recognizes that the Project is significant and transformative, as it adds growth and diversification to Veresen’s business, and expects that its success will have a positive impact on the Company’s business risk profile. However, the Project is much larger than those undertaken by the Company in the past and entails significant execution risks. The underpinning of firm long-term anchor shipping contracts will be critical to financing the Project in the market, and DBRS expects the Project to be syndicated, due to its relative size and complexity. DBRS will continue to monitor the developments on the Project to assess any impact on the Company’s financial profile.

Veresen’s business risk profile is 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)), from nearly 80% in 2007 to 49% in LTM Q2 2013. The Pipeline business is supported by take-or-pay contracts that provide cash flow stability. However, Alliance’s shipper contracts will expire on November 30, 2015. Although Alliance offers competitive tolls supported by its ability to ship liquids-rich gas, DBRS notes that there could be some margin pressure after the contract term expiry, as the Company may induce customers to re-contract or attract more liquids-rich gas to the system by offering lower toll rates. The growing Midstream business (gas gathering, processing and extraction of natural gas liquids (NGL); 40% of distributable cash) entails volatile earnings due to commodity price risk; 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, the majority of power generation business (11% of distributable cash) is supported by long-term contracts, with some volume risk protection.

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

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.