DBRS Confirms Maritimes & Northeast Pipeline, LLC at “A” with a Stable Trend

Dominion Bond Rating Service (DBRS) has confirmed the Senior Secured Notes (the Notes) at “A” with a Stable trend for Maritimes & Northeast Pipeline, LLC (M&NP US, or the Partnership), the U.S. portion of the pipeline system, concurrent with that for Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada), the Canadian portion (see the separate press release and rating report).

The confirmation reflects the strong investment grade shipper group, which covers virtually all of the Partnership’s committed throughput capacity (85% required) on a long-term take-or-pay basis. This ensures earnings stability, regardless of usage. The producers’ Pipeline Utilization Agreement (PUA) and Mobil’s Backstop arrangement offer further support. The latter would cover 40% of the maximum capacity (if unsubscribed and not covered by the PUA) in addition to its existing 42% firm service contracts, for a total of 82% commitments for the term of the bond issue.

The Mobil Backstop is important and should adequately cover debt servicing and ensure full repayment of the Notes as scheduled. The backstop applies if the independent Reserve Report to be provided by November 2007 indicates insufficient reserves for the remaining term of the Notes to justify the continued use of the pipeline, leading to potential de-contracting. Further, the compression project completed in the fourth quarter of 2006 and other drilling activities in the region should enhance recovery prospects, resulting in a likely sufficient reserves test. The recently approved rate increase (12.2%) together with a partial roll-in (equivalent to 60%) of Phase III’s capital cost in the rate base should enhance stability of earnings and cash flow.

The pipeline system provides proximity and low cost access to the Canadian Maritime and growing New England markets. Phase III expansion, commenced in late 2003 and interconnecting with the Algonquin HubLine, opens up market opportunities for the existing shippers in the Massachusetts area. The new Phase IV expansion should provide further growth opportunities. Its focus on liquefied natural gas developments, principally the Canaport project in Saint John, New Brunswick, proposed by Repsol YPF and Irving Oil Limited, introduces another supply source for the pipeline. The proposed firm transportation contract could entail doubling of the M&NP US pipeline capacity to 833,000 dth/d (880 mmcf/d) through looping at relatively low cost to ship liquid natural gas to New England, for in service expected in late 2008. It would also utilize excess capacity on the pipeline system, resulting in more competitive tolls based on the current cost of service arrangements. In addition, EnCana Corporation’s Deep Panuke project (previously stalled) could add growth prospects, although it is on a scaled down version (contracting details to be determined) and is partly dependent on using the existing infrastructure of Sable Offshore Energy Project (SOEP) in order to improve the project’s economics.

The aforesaid proposed projects could partly mitigate the ongoing challenges of disappointing drilling results from SOEP, which limit short-term interruptible contracts and could result in potential de-contracting, following the November 2007 reserve test. The Partnership’s substantial debt amortization schedule ($30 million in 2006) should be manageable.

M&NP US’s financial metrics should remain stable. Balance sheet leverage could temporarily rise with slightly weaker cash flow coverage, should Phase IV go ahead with a higher debt component than the current 43% level, or Phase III refinancing occur (currently totally equity funded). However, DBRS expects the Partnership to maintain its financial profile within the current rating category. The recent transfer of ultimate ownership (78% interest) of the Partnership from Duke Energy Corporation to Spectra Energy Corp. (Spectra was renamed from Duke Capital LLC), both rated BBB with a Positive trend, has no impact on the credit rating, which is primarily based on the credit quality of the long-term shippers and other credit support. The transfer is to facilitate the spinoff of the gas transmission and other assets to Spectra.

Note:
All figures are in U.S. dollars unless otherwise noted.