DBRS Confirms Maritimes & Northeast Pipeline Limited Partnership at “A”

DBRS has today confirmed the ratings on the 6.90% Senior Secured Notes due 2019 (6.90% Notes) and the 4.34% Senior Secured Notes due 2019 (4.34% Notes) (collectively, the Notes) issued by Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada or the Partnership) at “A”, both with Stable trends. The confirmation primarily reflects the credit support available to noteholders (as described below), the favourable regulatory environment in Canada and the fully amortizing nature of the Notes to maturity on November 30, 2019.

The Reserve Engineer’s Deliverability Report (Deliverability Report) issued in November 2007 concluded that, based on the restrictive methodology specified in M&NP Canada’s original financing documents, available reserves are insufficient to maintain throughput of 580,000 million British thermal units per day (mmBtu/d) for the ensuing eight years (the Test) and that the Test will likely not be met in the future.

Consequently, M&NP Canada’s equity owners (77% Spectra Energy Corp, 13% Emera Inc. and 10% ExxonMobil Corporation (ExxonMobil)) have not received cash distributions since November 30, 2007. This will continue until cash balances have been built up to an amount sufficient to meet all remaining scheduled principal and interest payments on the 6.90% Notes until maturity on November 30, 2019. As of June 30, 2010, there was approximately $156.2 million on deposit in the Escrow Account. Full collateralization of the 6.90% Notes is currently expected during the first half of 2012, at which time DBRS expects the Partnership to resume distributions to its equity owners. The conventional natural gas reserve outlook for the east coast of Canada has deteriorated since the Test was incorporated into the original M&NP Canada financing documents in 1999. Consequently, holders of the 6.90% Notes have the benefit of this protection.

Holders of the 4.34% Notes do not share security in the Escrow Account.

However, the ratings on the 4.34% Notes and the 6.90% Notes are identical given that access to the Escrow Account does not affect the default risk of either issue. DBRS recognizes, however, that recovery would be more certain for the 6.90% Notes in the event of an uncured default (not expected by DBRS) given the exclusive access to the Escrow Account for these notes.

As a result of the above, M&NP Canada’s total debt-to-capital ratio (55% at June 30, 2010, compared with 68% at year-end 2007) is expected to continue to decline. This is mainly due to continued debt amortization and a rising equity base given the suspension of distributions to owners and the corresponding escrow buildup as well as the lack of major capital spending expected over the medium term.

EBIT interest coverage, debt service coverage and cash flow-to-debt ratios (3.1 times, 2.3 times and 21%, respectively, for the 12 months ending June 30, 2010) are expected to remain at satisfactory levels over time as a result of the amortizing debt profile and the declining balance sheet leverage. DBRS expects that M&NP Canada will maintain satisfactory debt service coverage ratios (DSCRs) in the range of 1.9 times to 2.2 times through full collateralization of the 6.90% Notes in 2012, followed by a higher level through the remaining term of the Notes. The DSCR in the period following full collateralization is calculated solely with respect to principal and interest on the 4.34% Notes.

In addition to the Escrow Account for the benefit of holders of the 6.90% Notes, the following levels of credit support remain available to M&NP Canada noteholders and continue to support the current rating:

(1) Firm Service Agreements (FSAs) with M&NP Canada shippers provide support on a ship-or-pay basis, ensuring relatively stable earnings and cash flow regardless of usage. At least 85% of contracted volumes must be held by investment-grade shippers (currently 95%). M&NP Canada currently has 475,574 mmBtu/d of contracted capacity (86% of design capacity), which could decline to 411,342 mmBtu/d (74% of design capacity) upon non-renewal of two contracts in Q4 2010. DBRS estimates that the current remaining weighted-average term of the FSAs is approximately six years.

(2) The Pipeline Utilization Agreement (PUA) requires Sable Offshore Energy Project (SOEP) producers (mostly investment-grade companies), on a several basis, to use M&NP Canada’s pipeline system (for up to 530,000 mmBtu/d of capacity, equal to 95% of design capacity) for the term of the M&NP Canada Notes by having their gas production from the related fields flow on M&NP’s system on days that certain economic thresholds are not satisfied, including when production from the related fields is greater than capacity contracted under the ship-or-pay contracts.

(3) The Mobil Backstop Agreement (Mobil Backstop) stipulates that ExxonMobil Canada (guaranteed by ExxonMobil) will pay for unsubscribed capacity in order to ensure that M&NP Canada will continue to receive revenues based on a certain minimum threshold of contract capacity (445,000 mmBtu/d, equal to 80% of design capacity for M&NP Canada) for the term of the M&NP Canada Notes. The backstopped capacity is reduced by M&NP Canada’s currently effective FSAs. Effectively, the Mobil Backstop provides important revenue 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 Canada Notes, including the two contracts noted above.

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

Cash held in an Escrow Account ($156.2 million at June 30, 2010) is held for the benefit of holders of the 6.90% Notes.

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