DBRS Maintains Veresen Inc.’s Ratings Under Review with Negative Implications Status

DBRS Limited (DBRS) has today maintained its status of Under Review with Negative Implications on the BBB Issuer Rating and Senior Unsecured Notes rating and the Pfd-3 Preferred Share rating of Veresen Inc. (Veresen or the Company). The ratings were placed Under Review with Negative Implications on August 4, 2016, following the Company’s announcement that it will sell its power generation business, suspend its Premium Dividend and Dividend Reinvestment Plan (DRIP) from August 2016 and maintain its current dividend payout. Proceeds from the sale of the power business will be invested to develop Veresen’s midstream projects in the core natural gas and natural gas liquids infrastructure business.

DBRS believes that the above-noted announcement is negative with respect to Veresen’s business risk profile. Historically, the Company’s credit ratings have been supported by stable earnings from the pipelines segment with additional support from the power segment, partially offset by the volatility in its midstream business. The Company’s renewable and gas-fired generation power business provides stable cash flows underpinned by long-term power purchase agreements with strong, investment-grade counterparties. DBRS believes that divesting the power assets and investing the proceeds to fund capital expenditure (capex) commitments at Veresen’s midstream business, which currently has a weaker credit profile, dilutes the quality of Veresen’s earnings. Furthermore, it limits the Company’s financial flexibility should the midstream capital projects get delayed and volumes processed are lower than forecasted. Going forward, after the sale of the power assets, DBRS expects a higher portion of the Company’s distributable cash flow to come from Veresen’s growing midstream business, which will weaken the Company’s overall business risk profile.

DBRS notes that Veresen had previously planned to fund its share of the large capex program at Veresen Midstream by raising equity through its DRIP. Veresen’s decision to suspend the DRIP and maintain its high dividend payout is expected to erode the Company’s equity base from current levels, resulting in higher non-consolidated leverage. The net proceeds from the proposed sale of power assets after repaying subsidiary level debt (Veresen’s share, $414 million at September 30, 2016) are expected to fund the Company’s large capex program. Although, this results in an initial reduction in leverage, Veresen will likely need incremental borrowings to fund its capex and dividend commitments going forward. As a result, the Company’s non-consolidated credit metrics are likely to be weak in the medium term.

Overall, DBRS believes that the weakness in Veresen’s business risk profile will not be mitigated by any meaningful improvement in the Company’s financial risk profile and will likely result in lower ratings. DBRS recognizes that there are execution risks related to the sale of the power business, and any delays in the execution and change in market conditions could affect the Company’s financial risk profile. Consequently, DBRS has placed Veresen’s ratings Under Review with Negative Implications. DBRS expects any downgrade of the Company’s ratings to be limited to one notch. DBRS will further review the details relating to the sale of the power business as they become available and aims to resolve the Under Review with Negative Implications status after the sale transactions have closed. Veresen expects to enter into binding sale agreements in Q1 2017, with closing in the first half of 2017.

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,
DBRS Criteria: Rating Holding Companies and Their Subsidiaries and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on our website under Methodologies.

Premium Dividend is a trademark of Canaccord Genuity Corp.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.