April 25, 2012 / 9:49 PM / in 6 years

TEXT-S&P cuts Maritimes & Northeast Pipeline to 'BBB-'

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.

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