DBRS Confirms Express Pipeline Limited Partnership & Express Pipeline LLC at A (low) and BBB (low)

DBRS has today confirmed the ratings of A (low) and BBB (low), with Stable trends, on the Senior Secured Notes (Senior Debt) and Subordinated Secured Notes (Subordinated Debt; collectively, the Notes) issued jointly and severally by Express Pipeline Limited Partnership & Express Pipeline LLC (collectively, Express) and guaranteed by Platte Pipe Line Company (Platte). All of the ratings are supported by the combined strength of Express and Platte (collectively, Express System) through the latter’s guarantee of the former’s obligations.

The confirmations reflect DBRS’s view that Express’s business and financial risk profile will remain stable over the medium term, supported by firm contracts currently covering 82.4% of throughput capacity (reducing to 42.5% after March 2012), with nearly 90% of commitments from investment-grade shippers. Long-term supply/demand trends support the importance of Western Canada Sedimentary Basin (WCSB) crude oil shipments to the U.S. Rocky Mountains (PADD IV) and Midwest (PADD II) regions.

The subordinated debt is rated three notches lower than the senior debt for the following reasons: (1) the much weaker overall debt service coverage ratio (DSCR) (1.74 times) compared with the senior debt DSCR (3.85 times) for the 12 months ended June 30, 2010, due to the significant level of senior debt that ranks in priority to subordinated debt ($136.5 million and $179.9 million, respectively, at June 30, 2010), and (2) failure to pay interest or principal on the subordinated debt will not result in an Event of Default under the Trust Indenture as long as any senior debt is outstanding.

The $110 million of Senior Secured Notes due 2020 have a bullet maturity and therefore creditors do not benefit from principal amortization over time, as was the case with the original debt issues. DBRS assigned the same rating to the non-amortizing issue as assigned to the Senior Secured Notes due 2013 based on (1) identical security, (2) declining total debt outstanding as the initial Notes fully amortize over time ($26.5 million remaining of original $150 million principal) and (3) the April 2005 expansion resulted in Express System becoming a more competitive entity than previously.

Expansion of throughput capacity on Express to 280,000 barrels per day (b/d) from 172,000 b/d, completed during April 2005, has had the following effects on Express System:

(1) The expansion enhanced the economic fundamentals and competitive position of Express. DBRS believes that Express will remain the major crude oil pipeline from the WCSB to PADD IV, providing needed crude oil supply to refineries in that region. The combined toll for shipping light crude oil on the full Express System to Wood River is $1.80 per barrel for committed shippers and $3.80 per barrel for uncommitted shippers. This compares very well with the tolls of competing pipelines, including Enbridge Pipelines Inc.’s Mainline/Lakehead System (low-$3 per barrel range) and TransCanada PipeLines Limited’s Keystone Pipeline (not disclosed as of the date of this press release), Phase 1 of which was placed into commercial operation on June 30, 2010.

(2) Express System’s financial profile has remained consistent with the ratings, as its relatively high balance sheet leverage (debt-to-capital ratio of 55% at June 30, 2010) has been offset by strong profitability and coverage ratios. DSCR has exceeded 1.7 times since 2005 (1.74 times for the 12 months ending June 30, 2010 (LTM June 2010) compared with 1.55 times in 2004) and cash flow-to-total debt has exceeded 20% since 2008 (21.8% for LTM June 2010 compared with 17.1% in 2007 and 11.9% in 2005).

(3) Shipper commitments on Express cover 82.4% of current capacity (remaining at that level until March 2012), up from 67% of initial capacity prior to the April 2005 expansion. While Platte continues to rely on uncommitted volumes for throughput and revenue, relatively strong throughput on Express over the past few years has had a positive impact on Platte volumes.

(4) Full servicing of all of the Notes requires either re-contracting of expiring capacity (shipping contract commitments equivalent to 40% of current capacity expire in March 2012) or a higher proportion of uncommitted volumes in future years. In addition, the last shipper contract expires in September 2015, more than four years before the last debt issue matures in January 2020. Consequently, Express System faces refinancing risk on the non-amortizing Senior Secured Notes due 2020, whereas the other debt obligations are fully amortizing. DBRS estimates that, even in the unlikely event that the Express contracts are not renewed and volumes drop to 50% of capacity (compared with 70% in the first half of 2010), Express System would still be able to meet its debt service obligations through 2020, given the much lower debt levels in future years. Therefore, DBRS expects these issues to be manageable due to the strong competitive positions of Express and Platte, as well as the long-term demand for crude oil in their markets.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas and Pipelines), which can be found on our website under Methodologies.