DBRS Confirms Gaz Métro Limited Partnership at STA-2 (middle), with a Stable trend

DBRS has today confirmed the stability rating of Gaz Métro Limited Partnership (GMLP or the Partnership) at STA-2 (middle) based on the stable cash flow from its low business risk operations and stable financial profile. GMLP continues to generate a significant portion of its earnings and cash flow from its natural gas distribution activities in Québec and other regulated activities, deriving approximately 88% of its consolidated EBITDA from the natural gas and electricity distribution activities in Québec and Vermont. Though earnings remain sensitive to interest rates through approved ROEs, the Partnership continues to have a good command of its regulatory processes in Québec and Vermont, and has been able to achieve incentive returns higher than the approved rate of return. Furthermore, the Partnership continues to generate cash flow from operations that are sufficient to internally finance both maintenance capital expenditure and distributions to its partners, which DBRS expects to continue. Through the third quarter of 2008, payout ratios improved over 2007 levels, largely due to higher earnings in the distribution businesses.

One of the challenges the Partnership faces is limited organic growth in its gas distribution system in Québec; however, if gas becomes more competitive with electricity cost, growth in new customers is likely to occur. GMLP signed up more customers in 2008 than it did in 2007, which is expected to contribute to revenues in the near to medium term. Market penetration of natural gas in Québec is well below the national Canadian average due to the low cost of electricity in Québec. Though gas distribution throughputs are somewhat volatile in conjunction with the tight competitive situation between natural gas and fuel oil in Québec, natural gas is generally competitive in the commercial markets.

DBRS expects GMLP will continue to explore ways to diversify its operations through targeted acquisitions and new project developments in connection with its strategy to become an integrated energy provider. The acquisition of Green Mountain Power (GMP) in 2007 offers both geographical and operational benefits to GMLP and is similar to the Partnership’s risk profile. Some growth in earnings and cash flow could come from two potential project opportunities; the completion of the Seigneurie de Beaupré wind projects in Québec after 2013 and the Rabaska liquefied natural gas (LNG) terminal project. GMLP has partnered with experienced operators on the two projects and expects that the LNG project would be contracted on a long-term basis. DBRS expects that both projects would be financed in a manner that will limit GMLP’s exposure.

GMLP continues to evaluate its various alternatives to mitigate the impact of the new tax legislation expected to be effective on October 1, 2010, and to maintain the capital structure of its regulated utility business in accordance with regulatory approved levels. As DBRS stated in its November 2006 press release, any reduction in future distributions due to the imposition of new taxes would be viewed as a one-time event, with subsequent analytical focus on the stability and sustainability of the revised distributions.

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

The applicable methodology is Income Funds, which can be found on our website under Methodologies.

This is a Corporate rating.