Date of Release: 2009-11-20
DBRS has today confirmed the rating of NOVA Gas Transmission Ltd. (NGTL or the Company) at “A” with a Stable trend. The confirmation is based on NGTL’s strong credit profile and stable operations, as well as the credit strength and implicit support of its parent, TransCanada PipeLines Limited (TCPL) (see separate report published November 20, 2009), which has provided financing to NGTL since its merger with TCPL in 1998. DBRS expects NGTL to repay debt as it matures, or to refinance with intercompany borrowings. The ratings of TCPL (“A” and R-1 (low)) have been concurrently confirmed, based on its maintenance of a stable financial profile, the regulated nature of its business and substantial growth prospects underpinned by long-term contracts.
NGTL owns the Alberta System, which forms an integral part of TCPL’s pipeline systems, and accounted for approximately 17% of TCPL’s consolidated EBITDA for the first nine months of 2009 (9M 2009). Despite its expansion programs estimated at $1.6 billion from 2009 to 2012 ($700 million expected in 2009), its share may decline slightly going forward, as a result of TCPL’s acquisition of KeySpan-Ravenswood, LLC announced in April 2008 and with additional projects such as Keystone Pipeline starting up in the near to medium term. NGTL remains a major natural gas transporter in western Canada, shipping about two-thirds of that region’s output; profitability, although reduced by the shift to a regulated rate of return from a negotiated settlement in 2004, does remain acceptable. However, capital investments should more than offset the impact of a declining investment base, providing growth prospects in the near to medium term. In October 2008, NGTL received approval from the Alberta Utilities Commission (AUC) to construct the $925 million North Central Corridor (NCC) expansion, a 300-kilometre (km) natural gas pipeline and associated facilities connecting the northwest and northeast portions of the Alberta System. The 140 km North Star section, including two 13 MW compressor units at the Meikle River compressor station, was completed, with the two units operational as of May 2009 and August 2009, respectively.
In late September 2009, construction of the 160 km Red Earth section began, with completion expected in April 2010. The Company expects NCC to reduce fuel consumption on the entire Alberta System by approximately 50%, resulting in shipper savings of between $50 million and $75 million per year, thereby enhancing the Alberta System’s competitive position. This should partly offset the substantial rate hike expected on the Mainline System in 2010 due to falling throughput volumes
In February 2009, the National Energy Board (NEB) approved TCPL’s application for federal regulation of the Alberta System. Federal oversight of the Alberta System will allow TCPL to provide integrated services by extending the pipeline across provincial borders, allowing potential customers (i.e., British Columbia (BC) and the Northwest Territories) to connect directly to the network. Following the approval, in April 2009, NGTL filed for approval with the NEB to construct the 77 km Groundbirch Pipeline connecting the Montney shale gas region in northeastern BC to the Alberta System (estimated project cost of $250 million). NGTL has received 1.1 bcf/d of commitments by 2014. Subject to approvals, the pipeline is expected to be in service by Q4 2010. In May 2009, NGTL also filed a project description with the NEB to construct the 155 km Horn River natural gas pipeline extending the Alberta System to the Horn River shale gas region in northeastern BC expected in service by 2012 (estimated project cost of $340 million).
The Company faces certain limiting factors, including continued de-contracting, natural gas supply risk and cost pressure caused by competition from Alliance Pipeline and Vector Pipeline. However, NGTL’s tolls are determined on a cost-of-service basis, resulting in protection from short-term throughput risk and stable financial metrics. Throughput volumes should be helped by the potential rise in unconventional gas production at the Foothills and northeastern BC at the time for which NGTL’s expansion projects are targeted. In December 2008, the AUC approved NGTL’s 2008-2009 revenue requirement settlement, which established fixed costs for return on equity, income taxes, and OM&A, with any costs savings (subject to adjustments) accrued to NGTL resulting in more favourable results in 2009, in addition to the expanding investment base. The NGTL is now in discussions to transfer the settlement to NEB jurisdiction and finalize 2009 tolls.
Given the investment in the NCC and future plans in BC, DBRS expects the Company’s cash flow-to-total debt to remain lower in the near to medium term (0.12 times in the last twelve months ended September 30, 2009 (LTM 9M 2009)) as debt levels increase through intercompany loans from TCPL. Furthermore, EBIT/interest coverage fell slightly under two times (1.95 times for LTM 9M 2009). Long-term prospects are supported by northern gas developments that should result in northern gas supplies being connected to the Alberta System, expected by the end of the next decade. TCPL has an optional ownership interest in the Mackenzie Gas Pipeline and Alaska Pipeline projects.
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 the DBRS website under Methodologies.
This is a Corporate (Energy) rating.
The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.
| Issuer | Debt Rated | Rating Action | Rating | Trend | Notes | Published |
|---|---|---|---|---|---|---|
| NOVA Gas Transmission Ltd. | Medium Term-Notes & Unsecured Debentures | Confirmed | A | Stb | 20 Nov 2009 |
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