DBRS Confirms Maritimes & Northeast Pipeline Ltd. Partnership at “A”

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

The confirmation reflects the strong investment grade shipper group, which covers most of the pipelines’ throughput capacity (96% versus 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 35% of the maximum capacity in addition to its existing 42% firm service contracts (including assignments), for a total of 77% commitments for the term of the bond issue, if unsubscribed and not covered by the PUA.

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 pipeline system provides proximity and low cost access to the Canadian Maritime and growing New England markets, including the Massachusetts area through Phase III expansion in-service in late 2003. The new Phase IV expansion opens up other supply sources, focusing on liquefied natural gas (LNG) developments, principally the Canaport project in Saint John, New Brunswick, proposed by Repsol YPF and Irving Oil Limited. The proposed firm transportation contract could entail doubling of the pipeline capacity of M&NP US at relatively low cost to ship LNG to New England, for in-service expected in late 2008. It would also utilize excess capacity on the pipeline system. This would benefit M&NP Canada and result 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 challenge 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 ($42 million in 2006) should continue to be manageable, resulting in a balance of $188 million in 2009 on maturity, which should be easily refinanced based on the Partnership’s credit standing. M&NP Canada’s financial metrics, should remain stable, given that there are no major expansions in the near term, until Deep Panuke goes ahead with start-up expected by late 2010.

In any event, DBRS expects the Partnership to manage its financial profile within the current rating category. The recent transfer of ultimate ownership (77% interest) of the Partnership from Duke Energy Corporation (Duke Energy) to Spectra Energy Corp. (Spectra was renamed from Duke Capital LLC), each rated BBB with a Positive trend, has no impact on M&NP Canada’s credit rating, which is primarily based on the credit quality of the long-term shippers and other credit support provided to bondholders. The transfer is to facilitate Duke Energy’s spinoff of its gas transmission and other midstream assets to Spectra. A new toll settlement with the Partnership’s shippers was approved, with slightly more favourable terms than the previous arrangement, which expired on December 31, 2006.

Longer term, M&NP Canada is well positioned for growth driven by the strong natural gas demand in the underserved New England market. Growth of LNG and other supply sources will also bolster pipeline demand and fuel expansion opportunities.

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