DBRS Confirms Maritimes & Northeast Pipeline at A

DBRS has today confirmed the ratings on Maritimes & Northeast Pipeline Limited Partnership’s (M&NP Canada) 6.90% Senior Secured Notes due 2019 and on Maritimes & Northeast Pipeline, LLC’s (M&NP U.S.) 7.70% Senior Secured Notes due 2019 (together the M&NP Notes), at A, both with Stable Trends.

The confirmations follow issuance of the Reserve Engineer’s Deliverability Report, which concluded that, based on the restrictive methodology specified in the M&NP financing documents, available reserves (as specified in the methodology) are insufficient to maintain throughput of 580,000 mmBtu/d for the ensuing eight years (the Test), and that the Test will likely not be met in the future. M&NP Canada and M&NP U.S. currently have 555,000 mmBtu/d and 360,000 mmBtu/d of contracted capacity, respectively. Despite the negative Test result, the remaining levels of credit support available to M&NP Note holders continue to support the current ratings.

The immediate consequence of the Test results is that M&NP’s equity owners (77% Spectra Energy Corp, 13% Emera Inc. and 10% ExxonMobil Corporation) cannot receive cash distributions after November 30, 2007 until cash balances have been built up in an escrow account to an amount sufficient to meet all remaining scheduled principal and interest payments on the M&NP Notes through to maturity in November 2019.

The following levels of credit support remain available to M&NP Note holders and continue to provide support for the ratings:

(1) Firm Service Agreements (FSAs) with M&NP shippers provide support on a long-term take-or-pay basis. Shippers are required to pay demand charges to cover M&NP’s fixed costs (including interest and depreciation expenses), regardless of volumes shipped. Variable costs are charged on a volumetric basis if gas is shipped. At least 85% of contracted volumes must be held by investment-grade shippers (currently 96% for M&NP Canada and 99% for M&NP U.S.). The remaining weighted average term of the FSAs is approximately eight years in both Canada and the United States as some of the contracts expire prior to maturity of the M&NP Notes.

(2) The Pipeline Utilization Agreement (PUA) requires the Sable Offshore Energy Project (SOEP) producers (mostly strong investment-grade companies), on a several basis, to utilize the bulk of the design capacity provided by M&NP’s pipeline system (530,000 mmBtu/d, equal to 91% of maximum contracted capacity for M&NP Canada; 360,000 mmBtu/d, equal to 82% of maximum contracted capacity for M&NP U.S.) for the term of the M&NP Notes as long as gas is being produced from the related fields.

(3) The Mobil Backstop Agreement (Mobil Backstop) stipulates that Exxon Mobil Canada (guaranteed by ExxonMobil Corporation) will pay for unsubscribed capacity, in order to ensure that certain minimum threshold volumes are achieved (445,000 mmBtu/d, equal to 77% of maximum mainline capacity for M&NP Canada; 360,000 mmBtu/d, equal to 82% of maximum mainline capacity for M&NP U.S.) for the term of the M&NP Notes. The backstopped volume is reduced by all of M&NP’s currently-effective FSAs other than those directly with ExxonMobil subsidiaries. Effectively, the Mobil Backstop provides important support in the event of non-renewal by certain original investment-grade shippers with FSAs that expire prior to the maturity of the M&NP Notes. In addition, ExxonMobil backstops any new FSA entered into with a non-investment-grade shipper under ExxonMobil’s request, if that FSA reduces ExxonMobil’s backstop obligation and ExxonMobil has consented to the new FSA, otherwise that shipper’s credit is not backstopped.

DBRS expects that both M&NP Canada and M&NP U.S. will maintain satisfactory debt service coverage ratios (DSCR) in the 1.6 to 1.9 times range through the remaining term of the M&NP Notes. As a result of the failed Test, cash will be built up in the escrow account for the benefit of the M&NP Note holders, rather than distributed to the equity owners. As a result, the Note holders have the benefit of this protection in the event of insufficient reserves, as was contemplated when the M&NP financings were completed in 1999.

DBRS notes that the conventional natural gas reserve outlook for the east coast of Canada has deteriorated considerably since the Test was incorporated into the M&NP financing documents in 1999. However, the Test did not contemplate the availability of liquefied natural gas (LNG) for re-gasification and shipment on M&NP U.S. In this regard, Repsol has signed a 25-year firm service agreement to ship 730,000 mmBtu/d of natural gas on M&NP U.S. beginning in late 2008, which will be accommodated by M&NP U.S.’s US$320 million Phase IV Expansion (currently funded with equity), currently under construction and expected to be placed in service in November 2008.

M&NP Canada’s long-term credit facility (C$233 million outstanding at September 30, 2007) amortizes quarterly to a balloon payment of approximately C$150 million due in November 2009. The M&NP Canada Notes (C$260 million) fully amortize in 20 equal semi-annual payments, commencing in May 2010. During the 12-month period ending September 30, 2007, M&NP Canada generated approximately C$95 million of cash flow, which was sufficient to fund C$42 million of debt amortization (applied to the credit facility) and C$45 million of distributions to its equity owners. Consequently, DBRS expects that sufficient cash balances will be built up in the escrow account to repay a significant part of the credit facility balloon payment in November 2009, reducing the re-financing risk associated with the balloon payment under the credit facility.

M&NP U.S.’s long-term credit facility (US$71 million at September 30, 2007) fully amortizes on a quarterly basis to a final payment in November 2009. The M&NP U.S. Notes (US$240 million) fully amortize in 20 equal semi-annual payments, commencing in May 2010. During the 12-month period ended September 30, 2007, M&NP U.S. generated approximately US$83 million of cash flow, which was sufficient to fund US$30 million of debt amortization and US$51 million of growth capex related to the US$320 million Phase IV Expansion, with no distributions to its equity owners during the period. The Phase IV Expansion is being funded on a 100% equity basis during construction, which is positive for M&NP U.S. Note holders, although potential re-financing with a significant debt component could occur after the project is placed in service. Under the current financing arrangements, a ratings confirmation will be required in order to place the Phase IV Expansion into service. DBRS currently expects that implementation of the Repsol contract would significantly improve the economics of M&NP U.S., allowing it to charge a lower toll than at present, thereby increasing its competitive position in the U.S. Northeast market. However, the addition of Repsol will negatively impact the weighted average credit rating of the M&NP U.S. shipper group. DBRS will conduct its detailed review of the implications of the project for M&NP U.S. when information becomes available.