DBRS Places Ratings of Alliance Pipeline Limited Partnership and Alliance Pipeline L.P. Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the following ratings of Alliance Pipeline Limited Partnership and Alliance Pipeline LP (Alliance Canada and Alliance U.S., respectively; collectively, Alliance or the Company) Under Review with Negative Implications, as listed below.

-- Alliance Pipelines Limited Partnership, Issuer Rating of A (low)
-- Alliance Pipelines Limited Partnership, Senior Secured Notes rated A (low)
-- Alliance Pipelines Limited Partnership, Senior Unsecured Notes rated BBB (high)
-- Alliance Pipeline L.P., Senior Secured Notes rated A (low)

The rating actions follow the recent announcements that Alliance has signed precedent shipper commitments for minimum three-year terms for its B.C. and Alberta receipt firm capacity offering of 1.265 billion cubic feet per day (bcf/d), which together with volumes contracted earlier, accounts for 100% of the pipeline’s firm capacity, and that it will close the precedent agreement process used to recontract its pipeline system on June 26, 2015. These precedent agreements become binding contracts for the Company’s capacity on its system for natural gas transmission services commencing December 1, 2015, when the National Energy Board (NEB) approves the Company’s new services offering and tolls (expected around mid-July 2015) and the Federal Energy Regulatory Commission (FERC) approves the revised U.S. tolls in line with the new services offering (expected by June 29, 2015).

IMPACT ON COMPANY’S BUSINESS RISK PROFILE
While the Alliance recontracting process has progressed well in terms of capacity contracted and is in line with DBRS expectation from a volume-commitment perspective (please see rating report dated July 23, 2014), DBRS notes that the overall quality of the shippers and the shorter-than-expected duration of the shipping contracts from December 1, 2015, based on the information available to date, is expected to weaken the Company’s business risk profile to a level that is no longer commensurate with the current ratings. The new ship-or-pay contracts replace the 15-year firm ship-or-pay transportation contracts that expire on November 30, 2015, and cover 100% of the pipeline’s capacity with approximately 83% of the shippers having investment-grade ratings that provided the strong support for the current A (low) rating. Although complete details on the new shippers, tenure and capacity contracted are not available, based on publicly available information, DBRS expects the majority of the new contracts to have a three- to five-year term, with one shipper on a seven-year contract, and more than 50% of the shippers with firm capacity contracts to be in the non-investment grade category. Furthermore, a single non-investment grade shipper has contracted for full path service on Alliance for the period from 2016 to 2022 covering up to approximately 38% of the pipeline’s firm capacity. As such, the new contracts expose Alliance to both increased shipper credit risk and recontracting risk. DBRS notes that the recontracting risk is further accentuated because a substantial amount of the combined debt at Alliance (approximately $1.0 billion) will remain outstanding beyond 2018. Going forward, given the weak natural gas pricing environment and North American natural gas liquids (NGL) prices testing new lows recently, it is expected that entering into shorter-term firm contracts would be the norm for producers and shippers. Furthermore, should some of the large B.C. NGL projects get commissioned in the next three to five years, higher natural gas flows to the west coast could affect utilization of the pipeline’s capacity to transport natural gas to the east and could affect the Company’s recontracting efforts in the future.

IMPACT ON COMPANY’S FINANCIAL PROFILE
Assuming that there is no regulatory change to the pipeline’s proposed tolling structure, DBRS also expects the new service offering and shipping contracts from December 1, 2015, to affect the Company’s financial profile. Operating cash flows are expected to be weaker as the new firm capacity tolls are approximately 25% lower compared with current tolls; however, the impact is expected to be marginally offset by the incremental cash flows from higher tolls on seasonal and interruptible services (covering approximately 300 million cubic feet per day) compared with the previous authorized overrun service where shippers were required to pay only applicable fuel cost. DBRS expects Alliance to maintain a reasonable credit profile with financial metrics improving in the medium term as the Company has a modest capital expenditure program and a majority of the debt is fully amortizing with a manageable repayment schedule. The senior secured debt at both the Canadian and U.S. entities contains cross-default provisions whereby an event of default by one entity constitutes an event of default by the other.

DBRS believes that the increase in the Company’s business risk as a result of the lower shipper credit quality and shorter term of the new contracts is likely to result in lower ratings. DBRS expects any downgrade of the above-noted ratings to be at least one notch and could possibly be two notches, depending on the quality of the final shipping group and duration of contracts. DBRS expects to resolve this rating action after the NEB and FERC approvals are received and full shipper details, including capacity contracted, are available.

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 methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (January 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.