DBRS Confirms Maritimes & Northeast Pipeline Partnership at “A,” Stable

DBRS has today 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 stable credit support available to noteholders, the favourable regulatory environment with cost-of-service based tolls and the fully amortizing nature of the Notes to maturity.

DBRS recognizes that the natural gas reserves in the Scotian Shelf basin, which provide the supply for M&NP Canada, are declining and delays on the Deep Panuke project could limit potential supply sources. The Reserve Engineer’s Deliverability Report (the Deliverability Report), issued in November 2007, concluded that, based on M&NP Canada’s original financing documents, available reserves are insufficient to maintain required throughput level for the ensuing eight years (the Test). Consequently, there were no distributions to M&NP Canada’s equity owners (Spectra Energy Corp (77%), Emera Inc. (13%) and ExxonMobil Corporation (ExxonMobil) (10%)) between November 30, 2007, and mid-Q2 2012, when balances in escrow reached an amount sufficient to meet debt service requirements on the 6.90% Senior Secured Notes (the 6.90% Notes). DBRS notes that MN&P faces re-contracting risk in 2019, when the 6.90% Notes and the 4.34% Senior Secured Notes (the 4.34% Notes; collectively, the Notes) mature and the ExxonMobil Backstop expires, given the declining capacity utilization and M&NP’s U.S. Northeast markets facing increased competition from Marcellus shale gas.

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.

M&NP Canada’s debt service coverage ratio (DSCR) is expected to remain satisfactory (2.03 times for LTM June 30, 2013), although debt service payments rose significantly in 2013 as a result of the sculpted nature of the 4.34% Notes debt amortization schedule and do not return to lower levels until 2018.

Notes:
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.