DBRS Confirms Pacific Northern Gas Ratings at BBB (low) & Pfd-3 (low) with Negative Trends

DBRS has today confirmed the Secured Debentures and Cumulative Redeemable Preferred Share ratings of Pacific Northern Gas Ltd. (PNG or the Company) at BBB (low) and Pfd-3 (low) respectively, both with Negative trends.

The Company’s financial profile has remained stable year-over-year, although at lower levels than in 2006, which was expected. Debt-to-capitalization remains under 50%, with cash flow-to-debt of 11% and EBIT interest coverage of 2.31x, which all remain adequate for the current credit rating. While PNG does not have a stated dividend policy, DBRS expects it will continue to manage its dividend policy in light of its CAPEX program and in a way that preserves its financial and credit profile.

PNG’s customer base has remained stable year-over-year despite the challenging economic conditions in its Western service area, mainly due to the challenges in the forestry sector. PNG’s Northeast service area continues to experience growth due to the oil and gas sector, which has offset the weakness in its Western system. DBRS expects the Company’s service areas to experience modest economic growth over the medium term and, as such, keep residents in the region; however, most of the growth is expected to come from the Northeast service area.

The competitiveness of natural gas as a fuel and heating source also remains a concern for PNG in the Western service area; however, residential and commercial electricity rates are expected to rise in the near term according to B.C. Hydro’s Service Plan. The proposed electricity price increase is expected to keep PNG’s delivered natural gas rates, including the Methanex impact, competitive with electricity rates in PNG’s Western system.

While PNG continues to pursue the Kitimat to Summit Lake Looping Project (KSL), no commercial arrangements have been made, and the Company continues to expense its share of the development expenditure, which is immaterial. DBRS also notes that should PNG decide to proceed with KSL, the Company's structure and financial profile will likely change and implications on the credit rating will be evaluated at that time.

PNG has maintained stable credit metrics since 2006, as well as generally stable service territories. These represent two of the three factors pertaining to the Negative trend as outlined in DBRS’s October 22, 2007 report. The third factor was if PNG’s KSL Project proceeded, and the impact it would have on the Company’s structure and credit profile. Whether the project proceeds remains unclear, although this uncertainty does not preclude resolution of the trend (due to the immaterial development expenditures being incurred). The favourable 2006 British Columbia Utilities Commission (BCUC) decision on the Methanex termination was key in maintaining PNG’s financial and credit profile. However, the Methanex amortization approved by the BCUC expires in October 2009 and the outcome of PNG’s recently filed rate application for increased rates to recover the lost revenue upon expiration remains critical to maintaining a stable financial profile and the current credit rating in the long term.

DBRS has confirmed the ratings and maintained the negative trend, but will look to resolve the trend when the BCUC decision has been rendered. A favorable decision by the BCUC is likely to result in a positive action (change in trend from Negative to Stable), while a negative decision would likely lead to a downgrade of the ratings. Based on the precedent set in the 2006 decision, DBRS expects that PNG will be allowed to recover its full cost of service.

PNG’s liquidity is adequate for the ratings, with debt maturities well spread out and no maturities until 2011. The Company’s liquidity is supported by three bank lines totaling $55 million, which mature in 2009 and 2012.

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.