Fitch Upgrades Express Pipeline, LLC's Sub Notes and Affirms Senior Notes; Outlooks Stable

NEW YORK--()--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 ($103.9 million outstanding) due 2019 (scheduled to be fully repaid in 2017) upgraded to 'BBB+' from 'BBB-'.

The Rating Outlooks on both issues are Stable.

The rating actions reflect the project's low leverage of 1.59x net debt/CFADS and the projected strong financial profile as new ship or pay agreements stabilize revenues. Refinance risk limits the senior debt to its current rating, though projected metrics remain strong under Fitch's refinance scenario of stressed interest rates. While the contracts provide more surety regarding throughput and revenue, some merchant risk remains as contracts expire.

KEY RATING DRIVERS

Stable Revenues: The project has diminished merchant revenue risk by contracting 86% of the pipelines' capacity with ship or pay agreements. The volume risk is further mitigated by the project's dominant position in the PADD IV region to import Canadian crude oil into the U.S. as well as its competitive contract and uncommitted tariff rates.

Operating Performance: The project benefits from a history of stable operating performance and a manageable cost profile. The operator is an experienced affiliate of the investment-grade sponsor, Spectra Energy Partners ('BBB'/Stable Outlook).

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 leverage metrics commensurate with the rating under Fitch's refinance scenario at 8% interest rate.

Debt Service: Projected performance is considerably improved based upon Fitch's projections for contracted and uncontracted throughput, commensurate with the ratings. Under Fitch's stress of reduced volumes and increased expenses consolidated debt service coverage ratios (DSCRs) average 10.89x with a minimum of 3.38x. Low debt levels produce net leverage ratios starting at 1.59x and averaging .47X through the forecast.

RATING SENSITIVITIES

--Significant reductions in total volume throughput;

--Inability to renew contracted volumes under ship-or-pay arrangements;

--Additional debt that erodes cash flow.

SECURITY

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. Platte Company guarantees 100% of principal and interest on the senior guaranteed notes and 30% of the subordinate principal debt obligations. The guarantee is a revenue and asset pledge for the debt obligations. 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.

CREDIT UPDATE

Operating Performance: Spectra has negotiated 225,000 barrels per day (bpd) of fixed price take or pay contracts, increasing contracted throughput by 89% on the Express line and 50% on the Platte line. The increase on Platte is due to the favorable crack spread in the Mid-Continent region and the relative low cost oil in the Western Canada and Bakken regions.

Financial Performance: The 2013 consolidated DSCR, which includes senior and subordinated debt was strong at 2.36x and consistent with the historical average of 1.85x. While the contracts protect Express from revenue volatility, Fitch's financial stresses also demonstrate the project's cash flow resilience on a merchant basis at the current rating level. Rating case financial analysis includes a 10% increase to expenses and capital expenditures (capex), inclusion of spending for storage build out and a reduction in throughput (12% on Express and 62% on Platte). Demonstrating the project's cashflow resilience, the project could absorb a reduction in throughput at Platte and Express of 72% and 54%, respectively, and still meet debt obligations.

Canadian Crude Volumes: Volumes on Express have been improving due to more product being drawn from Western Canada oil sands by refiners. Actual 2013 throughput of Canadian crude was 208,188 bpd (74.5% capacity factor). This is higher than the 2012 level of 189,877 bpd (67.8% capacity factor) and more consistent with historical experience. The project has renegotiated 225,000 bpd of ship or pay contracts with an average tenor of 11 years. The expected growth in Western Canadian production (4 million bpd in 2014 to 8 million bpd in 2030) should provide the opportunity to maintain throughput capacity as production increases. However, as these committed contracts expire, merchant exposure increases.

Expenses: Capex will be slightly elevated above the average range for the next three years as the company upgrades its SCADA system and related equipment. Still, capex is low, averaging below 3% of total revenues and used to maintain reliability and provide adequate storage capacity for customers.

SUMMARY

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 mile & 24 inch in diameter) which starts in Alberta, Canada and ends in Casper, Wyoming, has a capacity of 280,000 bpd. Platte pipeline (932 mile and 20 inches in diameter), which starts in Casper, Wyoming and ends in Wood River, Illinois, has a capacity of 143,000 bpd. The actual capacity and shipping charges are dependent on the nature of the fluid properties of the individual crude oil batches being shipped. 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', 11 July 2012.

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829494

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Contacts

Fitch Ratings
Primary Analyst
John Kennedy
Director
+1-212-612-7853
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0684
or
Committee Chairperson
Gregory Remec
+1-312-606-2339
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
John Kennedy
Director
+1-212-612-7853
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0684
or
Committee Chairperson
Gregory Remec
+1-312-606-2339
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com