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 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 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, 2011, there was approximately $214 million on deposit in the Escrow Account, which is expected to be fully funded at a balance of $263 million in Q2 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 occur until default and therefore does not affect the default risk of either issue. In addition, under the Permitted Investments definition, the Escrow Account could theoretically be funded with A (low)-rated debt instruments that mature at various dates up to November 30, 2019. This entails market risk should interest rates rise, as well as credit risk should the downgrade of certain securities result in forced sales at a loss. 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 (50% at June 30, 2011, compared with 70% at year-end 2006) is expected to continue to decline, mainly due to continued debt amortization and a rising equity base given the suspension of distributions to owners and the corresponding escrow buildup. However, DBRS believes that its adjusted debt-to-capital ratio (which removes the escrow balance from the partners’ equity account, given that the pipeline has no access to the funds except at default and has remained in the high-60% range since year-end 2007) is a more relevant measure of balance sheet leverage.

M&NP’s debt service coverage ratio is expected to remain satisfactory over time (2.2 times for the 12 months ending June 30, 2011) through full collateralization of the Escrow Account in Q2 2012. However, debt service payments related to the Notes rise significantly in 2013 as a result of the sculpted nature of the 4.34% Notes debt amortization schedule and do not return to the lower current levels until 2017.

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 ratings:

(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 (including deemed investment-grade) shippers (currently 91.5%, including the Mobil Backstop). M&NP Canada currently has 423,442 mmBtu/d of contracted capacity (76% of design capacity). DBRS estimates that the remaining weighted-average term of the FSAs is approximately six years.

(2) The Pipeline Utilization Agreement requires Sable Offshore Energy Project 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.

(3) The Mobil Backstop Agreement (Mobil Backstop) stipulates that ExxonMobil Canada (guaranteed by ExxonMobil) will pay for unsubscribed capacity to a maximum of 175,760 mmBtu/d. Combined with ExxonMobil’s FSA for 269,240 mmBtu/d, this implies that ExxonMobil ensures that certain minimum threshold revenues are achieved (based on 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.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on our website under Methodologies.