DBRS Confirms Gaz Métro Limited Partnership at STA-2 (middle)

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, stable financial profile and a supportive regulatory regime. A significant portion of the Partnership’s earnings and cash flow continues to be generated from its natural gas distribution activities in Québec and other regulated activities, with approximately 86% of consolidated EBITDA derived from natural gas and electricity distribution activities in Québec and Vermont. Though earnings remain sensitive to interest rates through approved return on equity (ROE) levels, 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 authorized rate of return. Though the Régie de l’énergie (the Régie) rejected the ATWACC (after-tax weighted cost of capital) methodology of calculating the authorized base rate of return proposed by GMLP, it chose to modify certain parameters of the current formula and established a base ROE of 9.20% for fiscal 2010. This is an increase over the 8.64% that the current formula would have produced.

Difficult economic conditions continue to affect GMLP’s ability to generate productivity gains as it experiences a decline in gas deliveries in all its markets. Its industrial gas deliveries have been particularly affected with the continued shutdown of the Partnership’s largest customer (a TransCanada Energy Ltd. power plant) and other major industrial customers announcing temporary plant closings in 2009. GMLP’s expects a productivity loss of $19 million for 2010, which will be fully reflected in the 2010 rates but should be fully repaid to customers from future overearnings or productivity gains.

The Partnership also continues to face limited organic growth in its gas distribution system in Québec, where the price of electricity in the residential market is low. GMLP signed up fewer residential customers in 2009 than in 2008 due to the economic situation. Market penetration of natural gas in Québec is well below the Canadian national average due to the low cost of electricity in Québec. Though gas distribution throughputs in the industrial and commercial markets 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 compared to electricity.

DBRS expects that 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. Some growth in earnings and cash flow could come from the completion of the Seigneurie de Beaupré wind projects in Québec after 2013. Electricity supply agreements expiring on December 1, 2033, have been signed with Hydro-Québec for the output from the plants. GMLP will be applying for construction permits, signing the final agreement with turbine supplier Enercon Canada Inc. and implementing appropriate financing, after passing key environmental approvals in 2009. DBRS expects that the project would be financed in a manner that will limit GMLP’s exposure. Furthermore, the Partnership continues to generate cash flow from operations that is sufficient to internally finance both maintenance capital expenditures and distributions to its partners, which DBRS expects to continue.

GMLP continues to evaluate its various alternatives to mitigate the impact of the new tax legislation. If GMLP were to announce a response to the tax changes, DBRS would evaluate it at that time. The Partnership will continue to maintain the capital structure of its regulated utility business in accordance with regulatory approved levels.

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.