Overview -- On April 19, 2012, we lowered our corporate credit rating on Repsol-YPF S.A. Repsol-YPF guarantees a counterparty contract of Repsol Energy North America Corp., which has a contract that represents about 88% of U.S. gas pipeline company Maritimes & Northeast Pipeline LLC's (Maritimes U.S.) capacity and 85% of its revenues. -- We are lowering our corporate credit and senior unsecured ratings on Maritimes US to 'BBB-' from 'BBB'. -- The outlook on Maritimes US is negative. A rating action on Repsol-YPF could necessitate a similar action on Maritimes US. Rating Action On April 25, 2012, Standard & Poor's Ratings Services lowered its corporate credit and senior unsecured ratings on U.S. gas pipeline company Maritimes & Northeast Pipeline LLC (Maritimes US) to 'BBB-' from 'BBB'. We also revised the outlook to negative from stable. The ratings downgrade on Maritimes US stems from the ratings change on Repsol-YPF S.A. to 'BBB-'. Repsol YPF guarantees a counterparty contract of Repsol Energy North America Corp. (Repsol; not rated), which has a contract that represents about 88% of Maritimes US's capacity. Rationale Maritimes US is a Delaware-based limited liability company that is a subsidiary of Spectra Energy Corp. (BBB+/Stable/--), which also operates the gas pipeline. The company and its Canadian affiliate, Maritimes & Northeast Pipeline L.P. (Maritimes Canada; senior secured rating A/Stable), own distinct portions of a 670-mile underground mainline pipeline extending from the Sable Offshore Energy Project (SOEP) processing plant in Goldboro, Nova Scotia, through New Brunswick, Maine, and New Hampshire through two interconnections with the natural gas grid in Massachusetts. The pipeline delivers gas to New England, including the greater Boston area. Maritimes US is the 330-mile portion, running from Baileyville, Maine, to Dracut and Beverly, Mass. The pipeline's total capacity is 833,317 Dekatherms per day. The 'BBB-' rating reflects the following strengths: -- The pipeline's capacity is fully contracted with negotiated rate and recourse rate firm demand contracts that have a weighted average remaining life of roughly 20 years. -- The pipeline's transportation capacity is contracted with shippers with a weighted average rating of 'BBB-'. Shippers with ratings that fall below investment grade may be required to post collateral, which offsets some of the counterparty credit risk. Repsol may be required to post collateral equal to one year of capacity payments if they fall to speculative grade under Maritimes US's FERC-imposed tariffs. -- Maritimes US has low operating risk because the pipeline is regulated and has cost-of-service rate tariffs. -- Demand for natural gas in the pipeline's destination markets in New England is strong. The following risks offset the strengths at the 'BBB' rating level: -- Counterparty concentration risk is high because Repsol will be responsible for about 85% or more of expected revenues. -- Single-asset risk reduces geographic diversity and magnifies operational risks. -- Lack of credit facilities and high dividends might restrict liquidity if cash flows from operations are disrupted. The rating on Maritimes US reflects its "satisfactory" business risk profile, which we mainly base on a contract signed with Repsol for 88% of the pipeline's capacity. Cash flows under this contract will occur whether or not gas is actually shipped, so we view them as very stable and low risk, although highly concentrated. Repsol-YPF, Repsol's parent, has provided a guarantee for Repsol's contracts that meets Standard & Poor's criteria for guarantees. We consider there to be a hard linkage between the rating on Maritimes US and the rating on Repsol-YPF. The companies' relationship is a key factor in the rating as the contract generates about 85% of the pipeline's revenues. The Federal Energy Regulatory Commission (FERC) settlement in April 2010 resulted in lower resource rates and less fuel retention, although it is not notably affecting financial results given the high percentage of capacity that Repsol contracts at a negotiated rate approved by the FERC. The rating on Maritimes US also reflects its significant financial profile. The company's debt will fully mature in 2014, and it will amortize over that time based on a 25-year schedule. The debt's amortization is significant because the credit metrics should improve over time, as the debt balance will be about $90 million by the time of refinancing in 2014. The metrics have been adequate for the rating, with funds from operations (FFO) to debt of about 20%, debt to EBITDA of 3.5x, and FFO interest coverage of 3x as of Dec. 31, 2011. We expect these metrics to remain relatively constant through 2014, when the full debt will come due. Maritimes US is owned by subsidiaries of Spectra (77.53%), Emera Inc. (12.92%; BBB+/Negative/--), and ExxonMobil Corp. (9.55%; AAA/Stable/A-1+). The high ratings on the owners and operator, which support creditworthiness, weigh less heavily on the Maritimes US rating than the rating on Repsol-YPF as guarantor of a key shipper. Repsol will provide most of the company's revenues and would be difficult to replace fully if the need were to arise. Before Maritime US's Phase IV expansion, the major supply basin for the pipeline was the SOEP, off of Nova Scotia, which has fewer reserves than initially forecast when the company built the pipeline. With the Phase IV expansion, the Repsol Canaport liquefied natural gas terminal in New Brunswick can supply the entire amount of Maritimes US's pipeline capacity, if necessary. In addition, it has supplies coming from SOEP, as well as expected production from the Encana Deep Panuke offshore natural gas basin in the North Atlantic, onshore basins in New Brunswick, and potential other production locations to be developed. Delivery points include the Tennessee Gas Pipeline, the Algonquin Pipeline, and Portland Natural Gas Transmission Pipeline, as well as customers in New England. Firm contracts provide steady cash flows, with almost 100% of the natural gas capacity on the pipeline shipped by investment-grade companies. In addition, the company can require collateral against contracts of shippers with ratings that fall below investment grade. The weighted average contract life of about 20 years is notably better than that of pipeline peers. Maritimes US removed much of the business risk on this pipeline by timing the completion of construction and inception of new cash flows to coincide with the inception of debt service. ExxonMobil provides a backstop for about 12% of firm contracted capacity, but we do not ascribe substantial credit support to the rating because of this agreement. This pipeline has flowed gas continuously since it went into service, and we expect low maintenance costs and relatively smooth operations in the near term. Liquidity We view Maritimes US's liquidity as adequate. For the next 12 months, we expect liquidity sources to exceed uses by about 1.3x. Cash sources consist of projected FFO of nearly $100 million and cash as of Dec. 31, 2011, was about $17 million. The company does not maintain a credit facility, which increases liquidity risk, but the high ratings on the parents mitigate much of this risk. The primary uses of cash are debt amortization of $20 million and dividend payments of nearly $80 million. We expect maintenance capital spending of about $1 million annually. Cash available for debt service is protected by a covenant that restricts dividends if the debt service coverage ratio, based on operating cash flows, falls below 1.25x. In absolute dollars, we expect cash sources to exceed uses by roughly $15 million during the next 12 months. This difference will remain positive even if EBITDA falls by more than 20%, which we would not anticipate given the highly contracted nature of the pipeline's cash flows. In terms of other qualitative factors, we would expect that the pipeline would curtail dividends to its sponsors should operating cash flow go down. Maritimes US's liquidity position benefits from no near-term debt maturities and low maintenance capital spending. We expect operations to generate positive free cash flow over the life of this debt. Outlook The outlook on Maritimes US is negative. A downward rating action on Repsol-YPF could necessitate a similar action on Maritimes US depending on the extent of any potential downgrade. A stable outlook would result if we changed Repsol-YPF's outlook to stable. Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List Ratings Lowered To From Maritimes & Northeast Pipeline LLC Corporate credit rating BBB-/Negative/-- BBB/Stable/-- Senior unsecured BBB- BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.