TEXT - S&P affirms Express Pipeline Partnership ratings
Overview -- Spectra Energy Corp. (BBB+/Stable/--) announced that it has entered into a definitive agreement to purchase 100% of the ownership interests in the Express Pipeline System from Borealis Infrastructure, the Ontario Teachers' Pension Plan, and Kinder Morgan Energy Partners L.P. for $1.49 billion. -- We are affirming the rating on Express' 'BBB-' $250 million subordinated secured notes due 2017 and the rating on its 'BBB' $110 million senior secured notes due 2020. In addition, we are maintaining the outlook on both notes at negative. -- The affirmation reflects our view that the pending change in ownership does not affect Express' credit profile if the existing debt is kept in place. -- The negative outlook reflects greater cash flow volatility following the expiration of 48% of Express' ship-or-pay contracts in March 2012. Rating Action On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' rating on Express Pipeline Partnership's $250 million subordinated secured notes due 2017 and the 'BBB' rating on its $110 million senior secured notes due 2020. The outlook is negative. As of Sept. 30, 2012, Express had $247.4 million of debt. Rationale The ratings affirmation reflects our view that the pending change in ownership does not affect Express' credit profile if the existing debt is kept in place. We rate Express on a project finance basis. Express Pipeline System is a 1,717-mile crude oil pipeline project running from Hardisty, Alta., to Wood River, Ill., consisting of three segments: Express Canada, from Hardisty to the U.S.-Canada border; Express US, from the border to Casper, Wyo.; and the Platte pipeline, from Casper to Wood River, Ill. Platte is more than 50 years old, and the Express pipelines were built in 1997. The pipeline ships oil from the Canadian oil sands to the Rocky Mountains and the U.S. Midwest and supplies the West Coast through complementary pipelines. Standard & Poor's Ratings Services' ratings on the individual notes reflect the following strengths: -- Revenues coming from the transportation shipping agreements provide for some cash flow visibility over the next few years. -- The system moves supply from the growing Canadian oil sands region to refineries in the Midwest and Rocky Mountain markets. -- The financing documents provide for a six-month debt-service reserve and a "rated" amortization that lags two years behind the "scheduled" amortization, which is more aggressive. If the company doesn't meet the scheduled amortization, it cannot make any distributions, and required payments will reflect the rated amortization. To date, Express has met the scheduled amortization. The following risks partially offset the strengths: -- The weighted average life of the shipper contracts is only about two years, creating recontracting risk. -- Significant capacity coming on line from newly built pipelines weakens the project's competitive position. -- The bullet maturity of the senior notes due in 2020 carries refinancing risk. The negative rating outlook on Express Pipeline System's notes reflects greater potential for cash flow volatility once 112,000 barrels per day (bpd), or 48% of the pipeline's ship-or-pay contracts, came due in March 2012. Standard & Poor's believes management will eventually execute new long-term contracts with shippers, but some volumes will be exposed to market rates until that time. While this recontracting need creates risk, Express's direct connectivity to a number of refiners in the Rocky Mountain region and strong demand for Bakken oil field-sourced crude by Midwest refiners support the pipeline's competitive position. Under our base-case scenario, we expect cash flows generated from uncommitted and existing firm contracts to result in a debt service coverage ratio of 1.5x in 2013. Liquidity We consider Express' liquidity to be "adequate" in the context of the project finance structure. The project's liquidity sources consist mainly of about $30 million of cash and projected $75 million of cash flow from operations over the next 12 months. Cash uses include capital spending, which have ranged from $4 million to $7 million in recent years, and debt service obligations, including interest and principal amortization, of around $45 million. The project benefits from a six-month debt-service reserve that it may fund with cash or with a letter of credit. The project cannot distribute cash to sponsors if it does not meet this reserve. If the 12-month trailing debt service coverage ratio (DSCR) falls below 1.3x, cash distributions to sponsors will stop until the project maintains a DSCR of more than 1.5x for four consecutive quarters. Cash distributions to sponsors will also be suspended if debt repayment falls below the level of scheduled amortization specified in the offering documents, and the notes will be considered in default if principal repayments then fall below the rated amortization specified in the offering documents. There are no refinancing needs for the project until the nonamortizing senior debt matures in 2020. The $250 million subordinated notes due 2017 amortize semiannually. The $110 million senior secured notes due in 2020 have a bullet maturity, but would be senior to the 2017 notes in a default scenario. Outlook The negative outlook on the subordinated notes due in 2017 and senior notes due in 2020 reflects greater cash flow volatility following the expiration of 48% of Express' ship-or-pay contracts in March 2012. We could lower the ratings on the notes if market fundamentals result in contracts being renewed at substantially lower rates, causing projected DSCR to fall below 1.3x to 1.5x. We could consider revising the outlook to stable if the pipeline successfully recontracts capacity such that cash flows stabilize or favorable market conditions brings keep projected DSCR above 1.5x. Related Criteria And Research Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 Ratings List Ratings Affirmed Express Pipeline Partnership $250 mil sub secd notes due 2017 BBB-/Negative $110 mil sr secd notes due 2020 BBB/Negative
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