DBRS Confirms Iroquois Gas Transmission System, L.P. at BBB (high)

DBRS has confirmed the Senior Unsecured Long-Term Notes rating of Iroquois Gas Transmission System, L.P. (Iroquois or the Partnership) at BBB (high), with a Stable trend.

Key strengths of the Partnership include the following: (1) Earnings and cash flow are supported by long-term firm service contracts with 37 shippers. Of the contracted capacity, approximately 78% is with companies deemed to be investment grade (12% through parental guarantees) and is mostly committed through to at least November 1, 2011, regardless of usage. The remaining contracted capacity of 22% is secured by letters of credit. (2) Iroquois benefits from continued strong natural gas demand through interconnections with four interstate pipelines, which provide about one-third of the natural gas consumed in the growing New England market. (3) Expansion projects support future earnings growth. The Eastchester extension (Eastchester), linking Long Island to Bronx, New York, has contributed to earnings since in-service in February 2004. Approximately 90% of the new capacity of 230,000 dekatherms per day (Dth/d) is committed (71% to February 2013). In addition, the planned Brookfield Market Access project, filed with the Federal Energy Regulatory Commission in March 2006, provides growth opportunities in the near to medium term.

Potential challenges include competition from other pipelines for supply of natural gas from western Canada. The Alliance and Vector Pipelines transport Alberta and B.C. gas to Chicago and eastern Canada, respectively, while Northern Border Pipeline moves gas from the Montana-Saskatchewan border to the U.S. Midwest, although all are facing capacity constraints with no expansions planned. In addition, Maritimes & Northeast Pipeline (M&NP) is the prime competitor in the U.S. Northeast due to its proximity to the market and its position as the only pipeline to currently source gas from offshore eastern Canada. M&NP’s capacity could double to over one billion cubic feet per day in the medium term, should expansions primarily in connection with proposed liquefied natural gas (LNG) projects proceed (currently in the regulatory process). However, gas supply concerns offshore the east coast of Canada limits M&NP as a competitor, at least in the near term (see separate reports on Alliance Pipeline and M&NP). Due to excess pipeline capacity, the Partnership’s firm service contract term could decline, over time, although this should be partly mitigated by the amortizing debt.

As there will not be major capex expected in the near term, Iroquois’ financial profile should remain stable as cash flow is used for distributions and debt reduction to keep the debt-to-capital ratio within the targeted 55% to 60% range (54% as of September 30, 2006). Growth in LNG imports could provide expansion opportunities in the longer term, including potential interconnections to a LNG terminal in New York proposed by its 44% owner, TransCanada Pipelines Limited. No major financing need is expected in the near term, unless the proposed Brookhaven project (cost undisclosed) for in-service by late 2008 goes ahead, involving construction of 21.5 miles of pipeline to a proposed 350 megawatt generation facility in Brookhaven, New York. The $200 million private notes due in 2010 should be easily refinanced based on Iroquois’ financial standing.

Note:
All figures are in U.S. dollars unless otherwise noted.