DBRS Confirms Issuer Rating of Inter Pipeline Fund at BBB, Trend Changed to Positive

DBRS has today confirmed the Issuer Rating of Inter Pipeline Fund (IPF) at BBB and changed the trend to Positive from Stable. The trend change reflects DBRS’s expectation that the $1.8 billion expansion project at its subsidiary, Inter Pipeline (Corridor) Inc. (Corridor – rated A (low) with a concurrent trend change to Positive, see separate press release) will be completed on schedule and on budget in late 2010. Corridor’s rate base is expected to more than triple relative to the existing level, resulting in a similar increase in earnings in the first full year following expansion completion. Consequently, IPF’s business risk profile will improve as low-risk Corridor earnings become a larger part of IPF’s operations.

IPF’s earnings are also expected to grow in the medium- to long-term, with its recent announcements to provide diluent pipeline service to Imperial Oil’s (Imperial, rated AA (high) by DBRS) Kearl oil sands project (Kearl Diluent Project), IPF’s Bow River expansion and its ongoing Cold Lake Pipeline expansion.

Successful completion of the Corridor expansion could result in a one-notch upgrade to IPF’s Issuer Rating. The primary considerations will include the timely and within budget completion of the Corridor expansion, issuance of equity into Corridor as planned, refinancing of IPF’s bank debt following the equity injection and evaluation of IPF’s non-consolidated credit metric targets post-completion of Corridor.

On a non-consolidated basis, following the Corridor expansion and the estimated $450 million equity injection (funded with bank debt) in late 2010, DBRS expects a debt-to-capital ratio in the mid-to-high-40% range, cash flow-to-debt in the mid-20% range and EBITDA interest coverage in the mid-four to mid-five times range over the medium term, which would be consistent with a one-notch upgrade to the current rating based on the improved business risk profile.

As of March 31, 2009, approximately 92% of Corridor expansion pipeline and facility costs subject to major cost overruns have been spent or committed, of which $1,174 million (65% of estimated project costs) had been incurred. The risk of significant cost overruns is low and IPF has no capital risk with respect to the remaining cost components, including line fill, interest expense and storage tank costs, which will be added to Corridor’s rate base at their actual cost. Corridor provides a vital link for the transportation of bitumen and diluent between two major components of the Athabasca Oil Sands Project (AOSP) and is supported by a long-term ship-or-pay firm service agreement with quality shippers, each of which is also an AOSP sponsor.

IPF generates earnings and cash flow from four segments: (a) Conventional Oil Pipelines (27% of 2008 DBRS-defined EBITDA); (b) Oil Sands Transportation (24%); (c) NGL Extraction (35%) operations all in western Canada; and (d) Bulk Liquids Storage (15%) operations in the United Kingdom, Germany and Ireland. Following completion of the Corridor expansion, IPF estimates that approximately 53% of its 2011 pro forma EBITDA would be derived from its stable Oil Sands Transportation segment, reducing IPF’s exposure to the more volatile profit-sharing contract at the Cochrane plant within the NGL Extraction segment to less than 10% in 2011 from 20% in Q1 2009.

IPF’s financial profile has remained reasonable despite the ongoing debt-financed Corridor expansion. Including the $173 million equity issue in June 2009, IPF’s pro forma non-consolidated debt-to-capital ratio of 33.5% at March 31, 2009 and cash flow-to-debt and EBITDA interest coverage ratios of 38.0% and 8.87 times, respectively, for the 12 months ending March 31, 2009 (LTM March 2009), are strong for the current rating, although likely to moderate over the course of 2009 given IPF’s planned $260 million growth capex program (the vast majority of which is related to low-risk liquids pipeline projects). IPF has maintained a conservative payout ratio (78% pro forma for LTM March 2009 based on cash available for distribution (DBRS-defined), although its target is 90%), partly in recognition of strong cash flows from near record fractionation spreads realized in the NGL Extraction segment through Q3 2008 and the positive contribution from Corridor.

IPF’s rating is currently constrained by the following factors, which are considered manageable:

(1) IPF faces certain risks associated with the Corridor expansion: (a) Potential timing delays with respect to completion of the AOSP expansion could delay placing the Corridor expansion into rate base. While the pipeline component is essentially complete, unforeseen delays (e.g., weather- or supplier-related factors) related to the facilities component of the expansion, could delay project completion. Construction must be completed prior to any expenditures being added to the rate base. DBRS expects that any such delay would be short term in nature. (b) The $1.8 billion Corridor expansion is 100% debt financed, $450 million (25%) of which will be recourse to IPF, which will be required to make an equity contribution for this amount upon expansion commencement. DBRS expects IPF to maintain reasonable credit metrics and liquidity on a non-consolidated basis in order to preserve availability under its credit facility to fund the equity injection. Although credit metrics are likely to be weakened from previously strong levels, the increased proportion of EBITDA from low-risk cost-of-service arrangements is a significant mitigating factor in its credit profile.

(2) IPF will face refinancing risk with respect to the $450 million equity contribution related to the Corridor expansion in late 2010 and on its own credit facility maturity in September 2012. IPF has issued equity over time (including a $150 million issue in December 2007, a $173 million issue in June 2009 and the May 2009 implementation of a premium DRIP that could raise an additional $130 million annually) in order to support its own non-consolidated credit metrics. Pro forma the June 2009 equity issue, IPF had $480 million of capacity remaining on its credit facility as at March 31, 2009, with no material debt maturities until 2012. DBRS believes that IPF may access the capital markets over the medium term in order to refinance some of the bank debt in order to improve its liquidity position at the time that the equity injection is required.

(3) NGL Extraction faces competition from upstream field services and is exposed to commodity price/fractionation spread risk (commodity-based contracts accounted for approximately 23% of total 2008 EBITDA). IPF has the ability to reduce its exposure to the fractionation spread risk through hedging activity and re-injection of propane-plus barrels back into the natural gas stream when extraction is uneconomic. As of March 31, 2009, approximately 34% of forecast propane-plus volumes at the Cochrane NGL extraction plant had been hedged for 2009 at a price of $0.85 per U.S. gallon and 11% for 2010 at $0.81 per U.S. gallon. Given stagnant natural gas production in Alberta, throughput risk under the fee-based contracts is an issue. This could be partially mitigated by the advent of shale gas in the medium term and northern gas in the long term.

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 rating.