DBRS Updates Its Report on Alliance Pipeline Limited Partnership

DBRS has today updated its report on Alliance Pipeline Limited Partnership (Alliance Canada or Alliance). DBRS notes that Alliance faces recontracting risk as most existing transportation contracts expire, on December 1, 2015, prior to a substantial amount of debt maturing during 2016–2025. DBRS recognizes that Alliance is well positioned to benefit from the strong market dynamics of growing liquids rich gas supply from unconventional developments in the Montney, Duvernay and Bakken formations. Alliance recently announced a new services framework and a precedent agreement process allowing shippers to reserve capacity post-2015 by offering low-cost rich gas transportation to premium downstream markets using a flexible tolling structure. However, no new long-term transportation contracts have been reached, and DBRS expects the duration of future contracts to be shorter and more competitively priced compared with current contracts. Although Alliance offers competitive tolls supported by its ability to ship liquids-rich gas, DBRS notes that there could be some margin pressure as the Company may need to lower tolls to induce customers to recontract. The risk is somewhat moderated as the pipeline operates at full capacity; offers multiple delivery options that will enable it to evolve from a single-service, single-toll to a multi-service pipeline providing both long-haul and short-haul services.

In line with its strategy to be a multi-service pipeline, Alliance placed its 127-km Tioga Lateral Pipeline into service in September 2013. The pipeline has a capacity of 126.4 MMcf/d (million cubic feet/day) linking new sources of natural gas and liquids-rich natural gas in the Williston Basin to downstream markets through the Chicago hub, including the Aux Sable fractionation facility. The pipeline provides a new stream of contracted earnings and cash flows, and enhances the supply diversity of liquids-rich natural gas available for processing.

Alliance continues to maintain a stable credit profile supported by take-or-pay transportation contracts, with approximately 83% of the shippers having investment-grade ratings. Alliance Canada has no exposure to volume risk, and has consistently generated strong cash flow sufficient to service its debt. Q3 results have been in line with DBRS expectations and credit metrics have been consistent with the current rating category.

In Q1 2013, Alliance Canada identified a requirement to revise the manner in which it recognized the regulatory asset associated with cost recovery of its depreciable assets. Previously, the cumulative difference between depreciation expense in the financial statements and depreciation expense in the transportation agreements was recognized as a long-term receivable. Based on this, Alliance no longer recognizes the cumulative difference between depreciation expense included in the financial statements and depreciation expense negotiated with shippers. As a result, Partners’ equity was revised down from $558 million to $360 million. Historically, the debt-to-capital ratio has remained stable but was relatively high at Q3 2013 77.4% (2012: 68.5%) due to this revision. However, DBRS notes that this is a non-cash adjustment and does not impact the Company’s financial profile, and that the current leverage is manageable, given Alliance Canada’s strong and stable cash flows which support the amortization of debt.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on our website under Methodologies.