DBRS Confirms Maritimes & Northeast Pipeline Partnership at “A”

DBRS has confirmed the Issuer Rating, along with 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) at “A”, all with Stable trends. The ratings primarily reflect the credit support available to noteholders, the favourable regulatory environment with tolls determined on a cost-of-service basis and the fully amortizing nature of the Notes to maturity.

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)) did not receive cash distributions between November 30, 2007, and mid-Q2 2012, when balances reached an amount sufficient to meet all remaining principal and interest payments on the 6.90% Notes. The $244 million Escrow Account balance at June 30, 2012, is expected to be distributed to the owners over the remaining term of the 6.90% Notes.

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.

M&NP’s debt service coverage ratio (DSCR) is expected to remain satisfactory (2.0 times for the 12 months ending June 30, 2012), although debt service payments 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.

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

Cash held in an Escrow Account ($244 million at June 30, 2012) is held for the benefit of holders of the 6.90% Senior Secured Notes due 2019.

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