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

DBRS has today confirmed the rating of Iroquois Gas Transmission System, L.P. (Iroquois or the Partnership) at BBB (high) with a Stable trend. The rating confirmation reflects the Partnership’s stable earnings and cash flow, solid credit metrics, continued strong natural gas demand in the New England market and expansion growth prospects. Iroquois’ earnings and cash flow are supported by longer-term firm service contracts (weighted average remaining term of over six years) with 37 shippers that provide long-term stability. Of the contracted capacity, approximately 72% is with companies deemed investment-grade based on DBRS’s internal review (12% through parental guarantees) and is mostly committed through to at least January 2014, regardless of usage. The remaining 25% of contracted capacity is secured by letters of credit or cash deposits, and 3% is considered creditworthy based on internal credit review. Iroquois also 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. It is also the only pipeline sourcing natural gas from Western Canada that has direct access to New York City.

In addition, expansion projects support future growth for the Partnership, with two projects expected to be in service by November 2008: (1) the MarketAccess project, which will deliver an additional 100 mmcf/d of natural gas from Brookfield, Connecticut to New York City under contract with Consolidated Edison Company of New York, Inc., and (2) Phase I of its 08/09 Expansion Project, which will ultimately provide up to approximately 200 mmcf/d to KeySpan Gas East Corporation. Both prospective shippers are existing customers with strong financial standing. Longer-term opportunities include the MetroExpress Project to supply Connecticut, Long Island and New York City with Rockies/Mid Continent natural gas and Atlantic liquefied natural gas (LNG) from developing terminals, for which a non-binding open season started in late January 2008.

Potential interconnections to an LNG terminal in New York proposed by its 44% owner, TransCanada PipeLines Limited, could occur to capture growth in LNG imports to the United States. With two expansion projects in progress for completion in November 2008, DBRS expects higher capital spending this year to be mainly financed, in the interim, by existing bank lines, which could lead to a slight weakening in credit and balance sheet metrics in the near term. However, the Partnership will likely adjust its dividend distributions to its partners to ensure a capital structure consistent with its current credit rating. DBRS expects Iroquois to establish a new credit line to replace its $200 million reducing term loan facility, which should be fully repaid when due in June 2008, to meet its liquidity needs. The $200 million private notes due in 2010 will likely be refinanced well in advance of maturity, due to Iroquois’ good financial standing and expanding asset base.

Potential challenges include competition from other pipelines for supply of natural gas from Western Canada, and increasing competition in the northeastern U.S. market. Further, due to excess pipeline capacity in the Western Canada Sedimentary Basin, the Partnership’s firm service contract term could decline, over time, although this is partly mitigated by the $170 million amortizing debt due in 2027 (amortization to begin in April 2008).

Regarding competition, Alliance Pipeline L.P. (Alliance) and Vector Pipelines (Vector) transport Alberta and British Columbia gas to Chicago and Eastern Canada, respectively, while the Northern Border Pipeline (Northern Border) moves gas from the Montana-Saskatchewan border to the U.S. Midwest. Alliance and Northern Border are facing capacity constraints with no expansions planned, although Vector has recently completed an expansion project. 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. The capacity of the U.S. portion of M&NP could double to over one billion cubic feet per day in the medium term, should expansions primarily in connection with Repsol YPF’s proposed LNG project proceed. However, gas supply concerns in offshore eastern Canada limits M&NP as a competitor, at least in the near term.

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