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

DBRS Limited (DBRS) confirmed the Issuer Rating as well as the 4.34% Senior Secured Notes due 2019 and the 6.90% Senior Secured Notes due 2019 (together, the Notes) ratings of Maritimes & Northeast Pipeline Limited Partnership (M&NP Canada or the Partnership) at “A” 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 tolls based on a cost-of-service framework, (4) cash collateral for debt service and (5) cross-default provisions of the Notes.

The ExxonMobil Canada backstop agreement and the ExxonMobil Canada FSA are set to expire on November 30, 2019. However, the existing Notes’ ratings are immune from re-contracting risk as they are expected to be fully repaid concurrently with expiry of the FSAs, at which time DBRS expects all ratings to be discontinued. The repayment of the 6.90% Senior Secured Notes, which have an outstanding balance of $13.0 million, is fully funded by cash balances held in an escrow account for the benefit of the noteholders and the Partnership is expected to generate adequate cash flow to repay the 4.34% Senior Secured Notes, which have an outstanding balance of $2.3 million. M&NP Canada’s key credit metrics continue to improve because of stable cash flow and the amortizing structure of the Notes. The Partnership’s cash flow-to-debt, debt-to-capital and EBIT interest coverage ratios for the last 12 months ended March 31, 2019, were 223.3%, 17.7% and 10.66 times, respectively.

Update on toll structure after expiry of FSAs and backstop agreement in November 2019
In April 2019, M&NP Canada filed an application with the National Energy Board to approve its toll settlement for 2020 and 2021 (Settlement Period). As a result of permanent production shut-in at the Deep Panuke offshore platform and the Sable Offshore Energy Project, pipeline utilization post-2019 is expected to be driven by demand characteristics in the domestic market. M&NP Canada has signed six precedent agreements with domestic shippers for the Settlement Period to provide firm and interruptible services; however, as pipeline capacity significantly exceeds demand, the firm billing determinants are projected to reduce to approximately 90,000 million British thermal units per day (MMbtu/d) from 434,000 MMBtu/d. While the average toll (excluding deferral charges) requested over the Settlement Period of $0.8235 per MMBtu is in line with the current toll of $0.8285 per MMBtu, the annualized revenue requirement requested has reduced to $56.4 million in 2020 from $138.1 million in 2019. As a result, DBRS expects cash flow to be materially lower post-2019. As per the application, balances under the existing deferral accounts will continue to be collected through tolls, but final tolls during the Settlement Period will be subject to a rate cap of $0.95 per MMBtu. Current natural-gas supply sources include the Portland Gas Natural Gas Transmission System and Canaport LNG. The Atlantic Bridge, expected in service in the first half of 2020, and Portland Xpress, expected in service in 2020, are also expected to 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.

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 & Criteria.

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.

As the Notes are expected to be fully repaid in November 2019, DBRS will not be issuing a full rating report.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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