DBRS Confirms Trans-Northern Pipelines Inc. at A (low)

DBRS has today confirmed the rating on the Senior Unsecured Notes (the Notes) issued by Trans-Northern Pipelines Inc. (TNPI or the Company) at A (low) with a Stable trend. The confirmation reflects the following factors:

(1) The primary term of long-term ship-or-pay contracts covering approximately 50% of TNPI’s capacity (40% with its one-third owner Suncor Energy Inc. (Suncor, rated A (low) by DBRS) and 10% with Ultramar Limited (Ultramar, wholly owned by Valero Energy Corporation, not rated by DBRS), provides sufficient revenue to meet required principal ($10.5 million annually) and interest payments for the $135 million of Notes issued as a private placement in December 2005, with the $40.5 million (30%) balance due in March 2015. DBRS expects that this amount will be refinanced and remain a component of TNPI’s regulated capital structure at that time. The debt amortization is expected to restore TNPI’s debt-to-capital ratio to the 45% to 50% range that was in place until 2003 compared with the relatively high level of 64% at December 31, 2009. DBRS expects the Company’s debt-to-capital ratio to steadily decline to 50% at year-end 2012. TNPI obtained a temporary waiver of its capital structure requirements by its regulator, the National Energy Board (NEB), in order to complete its major capacity expansion and line reversal project.

(2) TNPI offers the most economic tolls and reliable shipment option for the Montréal to Toronto, Ottawa and southern Ontario refined products markets, supporting stability of earnings and cash flow. This position is supported by long-term contracts covering approximately 50% of TNPI’s capacity (see above), with the balance mostly dedicated to un-contracted service for its two other one-third owners, Imperial Oil Limited (Imperial, rated AA (high) by DBRS) and Shell Canada Limited (Shell Canada, wholly owned by Royal Dutch Shell, not rated by DBRS). Suncor also ships un-contracted volumes from its Sarnia refinery through the Sun-Canadian Pipeline to a TNPI junction point near Pearson International Airport in Toronto. These volumes are then injected into the TNPI pipeline lateral for delivery to the airport. Major decisions at TNPI require two-thirds of the owners’ approvals.

(3) The current pipeline configuration supports Suncor’s servicing of its primary markets in southern Ontario through its Montréal refinery. The current pipeline configuration also supports Ultramar’s coverage of the Toronto market, following the reversal of a previously underutilized section of the pipeline.

(4) Potential competition from alternative fuels and other refineries could have an impact on the shippers, affecting TNPI’s throughput. In addition, consolidation of inland refineries in favour of coastal refineries could have a negative impact on refined product supplies in Ontario. Incremental supply is provided by Québec-based refineries and supplemented by European imports. European refineries produce excess gasoline in order to meet strong diesel fuel demand in domestic markets. Some of the excess gasoline supply is imported into Canada through the port of Montréal. In January 2010, Royal Dutch Shell announced that it plans to transform Shell Canada’s Montreal East refinery into a fuel terminal, citing weak returns in the refining industry. DBRS does not expect this change to have a material impact on TNPI. The owner-shipper relationship at TNPI should mitigate supply constraints.

(5) Despite lower economic activity in the past two years, reduced refined products demand in southern Ontario is supported by sufficient supplies. Incremental supplies are available from Québec-based refineries, including that of Ultramar, supplemented by imports from Europe. DBRS estimates that capacity utilization on the various pipeline segments has remained in the 75% to 80% range since the completion of the expansion and reversal project in March 2005.

DBRS expects the Company to maintain relatively stable earnings and cash flow going forward. Improvement in credit metrics will occur gradually as the project debt amortizes over time. With regards to liquidity, TNPI has a $25 million revolving credit facility expiring in July 2010. Approximately $17 million was drawn as of December 31, 2009.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Ratings

Back to top