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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Notes ratings of Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada or the Partnership) at “A,” all with Stable trends. The ratings are supported by (1) firm transportation contracts with investment-grade shippers, (2) backstop provided by ExxonMobil Canada, (3) regulated cost-of-service-based tolls (4) cash collateral for debt service and (5) that the two M&NP Notes have cross-default provisions.

M&NP Canada is a supply-push natural gas pipeline, which is highly dependent on the supplies from Sable Offshore Energy (Sable) and Encana’s Deep Panuke offshore platform. DBRS recognizes that the natural gas reserves in the Scotian Shelf basin, which provide the supply, are declining, and there is a moratorium on shale gas fracking in New Brunswick that prevents any new reserve development activity. This has resulted in declining pipeline utilization (31% in the 12 months ended June 30, 2015, from 65% in 2009). Throughput levels had improved in the past year with the help of supplies from Deep Panuke, which improved utilization levels. However, the Deep Panuke offshore platform has been shut-in since May 2015 and is expected to commence production only in the winter season. DBRS had previously noted that the higher throughput in 2014 on the pipeline may not be sustainable, given the unpredictable production profile of Sable and Deep Panuke, and the seasonality in demand (see rating report dated September 30, 2014).

DBRS notes that M&NP Canada faces re-contracting risk when existing firm shipping contracts expire in 2019. However, the existing Senior Secured Notes ratings are immune from re-contracting risk, as the 6.90% Senior Secured Notes and the 4.34% Senior Secured Notes (collectively, the Notes) are amortizing and are expected to be fully repaid by 2019, at which time the ExxonMobil Backstop also expires. DBRS is of the view that contract levels post-2019 will likely be lower than the current contracted capacity of 434,000 MMBtu/d. However, M&NP Canada’s strategy for the pipeline post-2019 is unclear at this time. The Partnership expects the declining offshore supply situation to be mitigated when the Atlantic Bridge project is placed in service (expected by November 2017). This link pipeline is designed to bring Marcellus Shale gas across the Algonquin Gas Transmission system and flow gas north on the M&NP U.S. system with deliveries into M&NP Canada, which is bi-directional. Furthermore, M&NP Canada will have a lower depreciated rate base by 2019, which is likely to provide for reasonable tolls.

M&NP Canada’s three-year negotiated toll settlement with its shippers (2014 to 2016) provides predictable revenues adequate to cover its operating costs and generate sufficient free cash flow for debt servicing. M&NP Canada’s credit metrics continue to improve because of the amortizing nature of the Notes and the relatively stable regulated cost-of-service-based earnings.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.