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

DBRS has today 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. The rating confirmation reflects the Partnership’s stable earnings and cash flow, solid credit metrics as well as its successful track record with expansion/growth projects as seen in the past two years. These positive attributes are further enhanced by Iroquois’ strong sponsorship and growing natural gas demand in the New England market. Iroquois’ earnings and cash flow are supported by longer-term firm service contracts (weighted average remaining term of approximately six years) with 38 shippers that provide long-term stability. Of the contracted capacity, approximately 72% is with companies deemed investment-grade based on DBRS’s internal assessment (14% through parental guarantees) and is mostly committed through firm shipping contracts to at least 2015 to 2019, regardless of usage. The remaining 28% of contracted capacity is secured by letters of credit or cash deposits, and 9% is considered creditworthy by Iroquois based on its 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.

Future growth for the Partnership is supported by expansion projects, including three that were completed on schedule in 2008 and 2009. In November, 2008, both the MarketAccess project, which delivers an additional 100 mmcf/d of natural gas from Brookfield, Connecticut (CT) to New York City under contract with Consolidated Edison Company of New York, Inc. (ConEd), and Phase I of its 08/09 Expansion project (08/09), which will ultimately provide up to approximately 200 mmcf/d to KeySpan Gas East Corporation (KeySpan), were placed into service. In January 2009, Iroquois also placed into service Phase II of 08/09, adding two compressor units in Milford, CT. Phase III, which will add an additional compressor unit at Brookfield is expected to be in service by November 2009.

All four projects are contracted long-term with strong investment-grade shippers, which should improve Iroquois’ overall credit profile, over time.

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. Potential interconnections to an LNG terminal in New York, proposed by its 44% owner, TransCanada PipeLines Limited (TCPL), could capture growth in LNG imports to the United States in the longer term, although the project is currently on hold.

The Partnership’s liquidity remains strong. In June 2008, Iroquois obtained a $45 million, 364-day, variable rate revolving credit line ($10 million drawn after March 31, 2009), which has been replaced by a 364-day $10 million facility (expiry June 2010), and fully repaid its $200 million term reducing loan facility. In May 2009, Iroquois successfully issued $140 million of Senior Notes which DBRS expects will be used to finance recent expansion projects as well as to pay annual distributions to its partners which were withheld in 2008. While pro forma credit metrics estimated by DBRS have deteriorated from 2008 levels (debt-to-capital and debt-to-cash flow are estimated at approximately 53% and 0.27 times, respectively), these remain in line with the Partnership’s historical levels and its targeted 40% to 45% equity component, and should be helped by the additional cash flow generated from the recently completed expansion projects. DBRS also expects that the $200 million private notes due in May 2010 will likely be refinanced by 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 (WCSB), 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 began in April 2008).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate rating.