TEXT - S&P affirms Express Pipeline Partnership ratings

Wed Dec 12, 2012 2:50pm EST
 
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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