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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Secured Notes (the 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 agreements (FSAs) with investment-grade shippers, (2) a backstop agreement provided by ExxonMobil Canada, (3) regulated cost-of-service-based tolls, (4) cash collateral for debt service and (5) cross-default provisions of the two Notes. 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.

M&NP Canada is a supply-push natural gas pipeline that is highly dependent on supplies from Sable Offshore Energy (Sable) and Encana Corporation’s (rated BBB (low) with a Stable trend by DBRS) Deep Panuke offshore platform (Deep Panuke) in Eastern Canada. DBRS recognizes that the natural gas reserves in the Scotian Shelf basin, which provide the supply, are declining and the development of cheaper shale gas plays have reduced gas prices in North America, making new development at Sable and Deep Panuke relatively uneconomic. Further, the moratorium on shale gas fracking in New Brunswick also prevents any new reserve development activity in the region. Production at both Sable and Deep Panuke has been declining over the last few years, resulting in decreased pipeline utilization (32% for the six months ended June 30, 2017, from 63% in 2014). However, the ExxonMobil Canada backstop agreement, in combination with ExxonMobil Canada’s FSA, ensure that M&NP Canada will continue to receive revenues based on a minimum throughput equal to 78% of design capacity. The existing Notes’ ratings are immune from re-contracting risk, as the 6.90% Senior Secured Notes due 2019 and the 4.34% Senior Secured Notes due 2019 are amortizing and are expected to be fully repaid in November 2019, at which time the ExxonMobil Canada backstop agreement also expires. In June 2017, M&NP Canada filed a three-year toll settlement for the 2017 to 2019 period and is currently operating under an interim toll as approved by the National Energy Board.

DBRS notes that M&NP Canada faces re-contracting risk when existing firm shipping contracts expire in 2019. The Partnership expects the declining offshore supply situation to be partially mitigated by Spectra Energy Partner’s Atlantic Bridge project. 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. However, DBRS is of the view that contract levels post-2019 will likely be lower than the current contracted capacity of 434,000 MMBtu/d (one million British thermal units per day). DBRS notes that the Partnership’s ratings are underpinned by the strength of the FSAs and the ExxonMobil Canada backstop agreement, and that M&NP Canada’s strategy post-expiration of the contracts in 2019 is unclear at this time. DBRS will review the strategy as it becomes available and its implication on M&NP Canada’s Issuer Rating.

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 principal methodology is Ratings Companies in the Pipeline and Diversified Energy Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.