Fitch Affirms Express Pipeline LLC's Ratings; Outlook Stable
NEW YORK -- May 17, 2013
Fitch Ratings has taken the following actions on the debt ratings of Express
Pipeline LLC/Express Pipeline LP (collectively, Express):
--Senior secured guaranteed notes of $110 million ($110 million outstanding)
due 2020 affirmed at 'A-';
--Subordinated secured notes at $250 million ($131.9 million outstanding) due
2019 (scheduled to be fully repaid in 2017) affirmed at 'BBB-'.
The Rating Outlooks for both ratings remain Stable.
KEY RATING DRIVERS
Merchant Revenues: Exposure to throughput volatility increases as long-term
ship-or-pay contracts expire in 2013 through 2015. Volume risk is mitigated by
the project's dominant position in the PADD IV region to import Canadian crude
oil into the U.S., and its low contract and tariff rates that make it price
Operating Performance: The project benefits from stable operating performance
and a manageable cost profile. Fitch considers the operator, Spectra Energy
Corp (rated 'BBB' with a Stable Outlook) to be experienced.
Debt Structure: Subordinate debt is fully amortizing and on schedule to pay
off two years prior to the legal maturity. Senior debt is a bullet structure
but maintains debt service coverage ratios (DSCRs) commensurate with the
rating under Fitch's refinance scenario.
Financial Performance: Historical performance is strong with DSCRs averaging
3.55x for senior debt and 1.82x consolidated for senior and subordinate debt.
--Significant reductions in total volume throughput;
--Lower than expected merchant or contracted prices.
All debt was issued on a joint and several basis in that the issuers (Express
Canada and Express US) are jointly liable for all debt obligations. The Platte
Pipeline Company pledges its revenues and assets to support its guarantee of
principal and interest payments on senior guaranteed and subordinated notes.
All notes are secured by the assignment of Express System's accounts
receivables from transportation revenues and a floating charge over the
Express Canada assets.
New Ownership: As of the first quarter of 2013, Spectra Energy Corp is the
owner and operator of the Express system. Spectra Energy Partners is
ultimately expected to own 100% of the project while Spectra Energy Corp
remains the operator. The change in ownership has no effect on the ratings as
SpectraEnergy has extensive experience in natural gas transport and storage.
Financial Performance: Fitch estimates the consolidated DSCRs in 2012 at 2.95x
for senior and subordinate debt. Under Fitch's rating case of reduced volume
at low prices and increasing expenses, consolidated DSCRs are projected to
decline to around 1.71x through 2015. Thereafter, DSCRs rise to over 3.0x as
subordinated debt fully amortizes in 2017, two years prior to the legal
maturity. The project paid off the $150 million senior secured notes in 2011.
Volume: Actual 2012 Canadian crude oil throughput was 192,000 barrels per day
(bpd) resulting in a capacity factor of 68%, up from 62% in 2011 but still
below the historical average of 72%. As the project's merchant exposure grows
(84% in 2015), revenues will be more vulnerable to volume fluctuations.
Committed volumes under ship-or-pay arrangements protected the project from
declines in throughput because offtakers had to pay whether or not they used
the pipeline. Though the project has a dominant position in the PADD IV
region, competition from potential pipelines could adversely affect Express
throughput. Management continues to explore its options for contract renewals
to mitigate this risk. Demand on the Platte pipeline is expected to remain
strong, as the pipeline transports U.S. domestic crude from the constrained
Bakken Region via its connection at Guernsey.
Costs: Expenditures to upgrade monitoring systems and add tanks for storage
increase the project's cost profile in 2013 and 2014. Thereafter, Fitch
estimates capital expenditures as less than 10% of total expenses, consistent
with past years.
The 'Express System', comprising of Express Pipeline and Platte Pipeline, is
an integrated 1,717-mile crude pipeline system that originates at Hardisty,
Alberta and terminates at Wood River, Illinois. Express Pipeline (785 miles &
24 inches in diameter) which starts in Alberta, Canada and ends in Casper,
Wyoming, has a capacity of 280,000 barrels per day (bpd). Platte Pipeline (932
miles and 20 inches in diameter), which starts in Casper, Wyoming and ends in
Wood River, Illinois, has a minimum capacity of 145,000 bpd. The actual
capacity and shipping charges are dependent on the nature of the fluid
properties of the individual crude oil batches being shipped. Express Pipeline
is mainly used by shippers to deliver crude oil to refineries in the Petroleum
Administration for Defense District (PADD) IV and PADD II regions. The debt is
serviced by the transportation revenues generated from the Express System.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', June 12, 2012.
Applicable Criteria and Related Research
Rating Criteria for Infrastructure and Project Finance
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