DBRS Confirms Valener Inc. at Pfd-2 (low), Stable Trend

DBRS has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low), with a Stable trend. The rating is based on the credit quality of Valener’s 29%-owned Gaz Métro Limited Partnership (GMLP), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A,” Stable) of Gaz Métro inc. (GMi), and Valener’s low non-consolidated leverage. GMi owns the remaining 71% of GMLP.

Approximately 62% of GMLP’s FY2013 reported EBITDA is from its relatively stable regulated natural gas distribution business in Québec, which operates under a supportive regulatory regime. GMLP also benefits from cash flow diversification from its investments in regulated energy distribution businesses in Vermont and the pipeline business. Distributions from GMLP have sufficiently covered Valener’s preferred dividends and interest and operating expenses. Valener’s rating is one notch lower than the rating of GMi, reflecting its structural subordination to GMLP.

Valener’s rating is based on the following factors: (1) continually strong and predictable cash flow from GMLP to Valener. GMLP has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for most of the last 20 years. (2) GMLP is expected to continue to maintain its distributions of at least 85% of its net income, excluding non-recurring items, as set out under the partnership agreement between Valener and GMLP (the Partnership Agreement). In the event that GMi, as general partner of GMLP, intends to distribute less than 85% of its net income, excluding non-recurring items, it would require the approval of at least 90% of GMi’s directors. (3) Valener’s non-consolidated debt-to-capital structure is expected to remain below 20%. If its non-consolidated debt leverage ratio is above 20%, Valener is expected to issue equity to bring the ratio back under the 20% threshold in a timely manner. (4) DBRS expects that the majority of Valener’s cash flow will be derived from GMLP. Any material investment carried out by Valener and not through GMLP could have a negative rating impact. (5) DBRS expects that Valener will maintain its 29% interest in GMLP and its pro rata representation on GMi’s board of directors.

The rating incorporates the limited control of Valener over GMLP due to its limited partnership status. However, this limited control is mitigated by the distribution protection clause in the Partnership Agreement.

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 Regulated Electric, Natural Gas and Water Utilities Industry (January 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.