April 13, 2016 - 4:37 PM EDT
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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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002446

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002446

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Yvette Dennis
Senior Director
+1-212-908-0688
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan
Director
+1-212-908-0675
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]


Source: Business Wire (April 13, 2016 - 4:37 PM EDT)

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