DBRS Confirms Trans-Northern Pipelines Inc. at A (low), Stable Trends

DBRS Limited (DBRS) has confirmed the Issuer Rating of Trans-Northern Pipelines Inc. (TNPI or the Company) and the rating of its Senior Unsecured Notes (the Notes) at A (low) with Stable trends. The confirmation reflects: (1) relatively stable demand in southern Ontario for refined products shipped on the pipeline; (2) economic tolls and reliable shipping options offered by TNPI for the Montréal to Toronto, Ottawa and southern Ontario markets. DBRS expects capacity utilization on the pipeline to remain consistently in the 75% to 80% range after expiry of the primary term of shipping contracts, and notes that the softness in oil prices will likely result in higher demand for refined products in TNPI’s service area, resulting in higher pipeline capacity utilization; and (3) improving leverage as a result of amortizing debt.

Expiry of TNPI’s primary term of the shipping contracts in March 2015 results in reduced firm capacity commitments covered by the ship-or-pay contracts to 11% from 50%. The rating assumes that the remaining portion of the unamortized Notes will be refinanced through a combination of bank credit facilities and debt private placement as there is no growth plan requiring substantial debt requirements. DBRS views that long-term ship-or-pay contracts will be required to support debt at historic levels and to maintain the current rating beyond March 2015.

TNPI’s financial metrics have been improving as the Company generates positive free cash flow sufficient to service its amortizing debt. The Company’s capital expenditure (capex) is expected to be minimal and dividend payments are flexible, providing a strong financial buffer. Given the reduced financing needs, TNPI expects to refinance the balloon payment through bank credit facilities and debt private placement. DBRS expects the Company to maintain its credit metrics consistent with current rating category; however, in the absence of adequate firm shipping commitments, TNPI’s credit metrics could come under pressure should pipeline utilization levels fall from current levels and higher-than-planned capex is required in the future.

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.

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

The applicable methodology is Rating Pipeline and Diversified Energy Companies (January 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.