Fitch Upgrades Express Pipeline, LLC's Sub Notes to 'A-', Affirms Sr Notes; Outlook Stable
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 of $250 million ($42 million outstanding)
due 2019 (scheduled to be fully repaid in 2017) upgraded to 'A-' from
'BBB+'.
The Rating Outlook on both issues is Stable.
The upgrade reflects that the subordinate debt, which matures two years
prior to senior debt, has a projected financial profile commensurate
with the senior debt. The project benefits from ship-or-pay agreements,
low leverage of 0.66x net debt-to-cash flow available for debt service
(CFADS), and cash flow resilience under potential merchant market
exposure. Performance for 2015 was consistent with expectations,
extending a history of strong operating and financial performance with
consolidated debt service coverage ratios (DSCRs) averaging 3.26x over
the last five years, supportive of the ratings.
KEY RATING DRIVERS
Stable Revenues: The project has diminished price and volume risk by
currently contracting approximately 85% 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 FERC-regulated
contracted and uncommitted tariff rates.
Steady 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).
Manageable Debt Structure: Subordinate debt is fully amortizing and on
schedule to pay off in 2017, two years prior to the legal maturity.
Senior debt is a bullet structure but maintains DSCRs commensurate with
the rating under Fitch's refinance scenario at a stressed interest rate.
Strong Coverage, Low Leverage: Under Fitch's rating case that considers
an all-merchant scenario coupled with increased costs, the financial
profile remains commensurate with the ratings. Consolidated DSCRs
average 4.1x through 2017 as subordinate debt amortizes. Thereafter,
DSCRs are about 8.2x under Fitch's refinance scenario for senior debt.
RATING SENSITIVITIES
Negative - Reduced Throughput: Significant reductions in uncommitted
volume throughput could lead to a downgrade;
Negative - Increased Leverage: Additional debt that materially erodes
cash flow could pressure the rating;
Positive - Positive rating migration is unlikely given the project's
ability to increase leverage to levels inconsistent with the current
rating.
CREDIT UPDATE
Financial performance remained strong in 2015, as Fitch estimated a
consolidated DSCR of 4.52x. Actual throughput of 219,243 b/d (78.3%
capacity factor) was greater than the 2014 level of 195,519 b/d (69.8%
capacity factor). The project, however, earned revenues in accordance
with ship-or-pay contracts for 239,000 barrels per day (b/d) of Canadian
crude oil which mitigates fluctuations in volume throughput. Contracted
volumes are scheduled to decrease, though Fitch expects total throughput
to remain stable based on continued demand and the pipeline's
competitive uncommitted tariff rates.
Management continues to invest in the maintenance of Express pipeline
with capital expenditures (capex) totalling $26.1 million in 2015 to
support routine maintenance as well as upgrades to the pipeline's
supervisory control and data acquisition (SCADA) system and a new
control center building. Routine capex is expected to return to the
project's historical level of around $9 million going forward. Expansion
capex will be funded by the sponsor, which includes developing storage
assets to maximize system throughput.
The project is resilient to the potential of lower demand. Express can
withstand a combined reduction in throughput at Platte and Express of
55% and 49%, respectively, and still meet debt obligations as reflected
in DSCRs of at least 1.0x. Fitch does not expect this level of decrease
in throughput but recognizes the potential for revenue decreases as
ship-or-pay contracts expire. Fitch believes the project's financial
profile will continue to be strong, even with the possibility of
increased competition, due to its revenue structure, competitive market
position, and low leverage.
Fitch projects strong financial performance consistent with historical
experience. Under Fitch's base case financial analysis, Express is on
track to generate sufficient cash to fully pay the $110 million bullet
due in 2020.
While 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. Fitch's rating case
under an all-merchant scenario includes a 5% decrease in Canadian volume
throughput for both 2016 and 2017 (consistent with average throughput
over the last five years), a 10% decrease in U.S. volume throughput, and
a 10% increase to operating and maintenance expenses compared to the
base case. Fitch's projections also include a refinance scenario for the
senior debt, amortizing through 2030 at a stressed interest rate of 8%.
Consolidated DSCRs average 4.3x through 2017 as subordinate debt
amortizes. Thereafter, DSCRs are about 8.7x under Fitch's refinance
scenario for senior debt. Net debt-to-CFADS is low at under 1.0x in
2016, and averages 0.52x after 2017 as only senior debt remains.
SUMMARY
Express System, composed 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 inches 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 depend 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.
SECURITY
All debt was issued on a joint and several basis in that the issuers
(Express Canada and Express U.S.) 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.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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