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.

The ExxonMobil Canada backstop agreement and the ExxonMobil Canada’s FSA which ensure that M&NP Canada receives revenues based on a minimum throughput equal to 78% of design capacity are set to expire in November 2019. However, 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. In March 2018, the National Energy Board (NEB) approved M&NP Canada’s three-year toll settlement for the 2017–2019 period which included an accelerated depreciation schedule which will result in approximately 86% of the M&NP system being depreciated by the end of the settlement period.

M&NP Canada faces re-contracting risk when existing firm shipping contracts expire in 2019. While M&NP Canada was originally envisaged as a supply-push pipeline as reflected in the current contract profile, the market dynamics have since changed materially. Supplies from Encana Corporation’s (rated BBB (low) with a Stable trend by DBRS) Deep Panuke offshore platform (Deep Panuke) has been permanently shut in and supply from Sable Offshore Energy (Sable) is also expected to terminate at year-end 2018. The development of cheaper shale gas plays, along with the moratorium on shale gas fracking in New Brunswick, is likely to prevent any new reserve development activity in the region. Consequently, the contract profile post-2019 is expected to be driven by demand characteristics in the domestic market. DBRS is of the view that contract levels post-2019 will be lower than the current contracted capacity of 434,000 million British thermal units per day (MMBtu/d); however, the accelerated depreciation schedule is expected to mitigate some of the impact of loss of volumes on post-2019 tolls. Excluding Sable, Portland Gas Natural Gas Transmission System and Canaport LNG are the current key supply sources. DBRS expects the impact of loss of offshore production on domestic supply to be partially mitigated by the Atlantic Bridge (in service: 2020) and Portland Xpress (in service: 2020) projects which will provide access to Marcellus Shale gas. Both projects are connected to the M&NP U.S. system allowing deliveries into M&NP Canada, which is bidirectional.

DBRS notes that the Partnership’s ratings are underpinned by the strength of the FSAs and the ExxonMobil Canada backstop agreement. M&NP Canada’s strategy post-expiration is under development. DBRS will review the strategy and its implication on M&NP Canada’s Issuer Rating as it becomes available.

Notes:
* Cash ($42 million at June 30, 2018) is held in an Escrow Account for the benefit of holders of these Notes.

All figures are in Canadian dollars unless otherwise noted.

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

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