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Fitch Assigns First-Time 'BBB' Ratings to Portland Natural Gas; Outlook Stable.

New York: Fitch Ratings has assigned a first-time Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating of 'BBB' to Portland Natural Gas Transmission System, a Maine general partnership (Portland). The Rating Outlook is Stable. Portland is the borrower under a $125 million senior unsecured revolving credit facility. Draws on the revolving credit facility are expected to be for general corporate purposes, including the financing of an important expansion project or for distributions to the owners of Portland.

Portland is a 20-year old 300-mile natural gas pipeline serving the northeastern U.S. states of Maine, New Hampshire and Massachusetts. The terminus of the pipeline is at the pipeline hub in Dracut, MA. Historically, the gas flowing through the pipeline represented shipper transactions for gas originating in Canada. Portland, in conjunction with its affiliates, is engaged in an expansion project called Portland Xpress, which is effectively fully contracted. Portland Xpress will enable Portland's shippers to access natural gas from the Appalachia basin (Pennsylvania, Ohio and West Virginia).

Portland's ratings reflect its low leverage and its long-term take-or-pay contracts with a diverse and creditworthy group of shippers. Portland is indirectly owned by TransCanada Corporation (A-/Stable) and Energir, L.P. (NR). TransCanada Corporation is the lead owner. Though Portland benefits by its relation to its owners, the rating for Portland is a stand-alone rating. Concerns embedded in the ratings for Portland are its small size, its concentration on a relatively small demand region, and construction risk (which includes permitting risk).

KEY RATING DRIVERS

Long-term Contracts with Creditworthy Utilities: By late 2020, Portland's contract portfolio is planned to have completely turned over compared to the beginning of 2017. Almost all capacity is scheduled to be under take-or-pay contracts with a weighted average life of 17 years. Approximately 85% of the long-term contracted shippers at that time will be gas utilities. Gas utilities are among the best types of "demand pull" customers. Demand pull customers tend to renew their contracts more often than "supply push" customers. This situation prevails at Portland insofar as Portland's current largest foundational customer (i.e., under the 1999-vintage contracts) is renewing its participation in Portland Natural Gas Transmission System by way of subscribing to a Portland Xpress contract, and increasing its take overall. Portland has some concentration risk, as to customers that are committed to take over 10% of post-Portland Xpress capacity.

Portland Xpress Fulfills Important Goals: The Portland Xpress contracts are compelling opportunities for Portland's customers. Contract sign-ups were sufficient to sanction an expansion of Portland, by approximately one-third. Certain conditions exist in New York and New England such that it has been difficult to furnish sufficient pipeline capacity into the region to assure the protection of homeowners and businesses from losing heat and other essential services during inevitable near-record cold snaps. Additionally, the Portland Xpress project extends outside (i.e., "upstream") of the Portland system in order to increase diversity of supply for Portland customers. Portland in the first instance, and customers once milestones have been met, will provide revenues to TransCanada Corporation's Mainline in order to add compression near Toronto. This compression will facilitate wheeling Marcellus formation gas (available either at Dawn, Ontario, or Buffalo, NY) through the Mainline and eventually to Portland's origin point on the Quebec-New Hampshire border.

Low-Risk Expansion Is Under Way: Portland Xpress is a compression project, which is a low-risk type of Midstream construction project. Neither water-crossings, nor trenching on mountain slopes are required for this project. Run-rate annual EBITDA at full completion of Portland Xpress will be approximately 20% higher than the 2017A-2018E average level.

Majority Parent Has Ample Resources: TransCanada Corporation has ample financial resources and sound business prospects. Fitch does not consider it likely that TransCanada would look to its many existing subsidiaries, including Portland, in order to aggregate funds for use at or near the ultimate parent level. Accordingly, leverage is expected to remain very low at Portland, relative to the Midstream sector.

Portland is judged by Fitch to merit standalone ratings, without any uplift from the stronger-than-Portland parent, TransCanada. It is noted that a levered intermediate holdco exists between TransCanada and Portland, and that this holdco, TC PipeLines, LP, is a Master Limited Partnership (MLP) that is 75%-owned (with no effective control in most scenarios) by public shareholders. TC PipeLines, LP has other subsidiaries besides Portland that have had their prospects materially clouded with uncertainty by the Federal Energy Regulatory Commission's (FERC) response to a Federal Court of Appeals ruling on income taxes in rate-making for companies linked to MLPs. TC PipeLines, L.P. recently cut its distribution 35% for the express purpose of preserving its investment grade profile in response to FERC's actions and possible future actions in general rate cases. Fitch views Portland as unaffected. Portland has now and is expected to have for the next two decades high contract coverage, and the FERC ruling on rate cases is not expected to have a material impact on Portland. As an overall regulator, responsible for diverse duties such as setting rates, granting permits, leading fellow federal agencies, and ensuring safety, Fitch regards FERC as an excellent regulator.

DERIVATION SUMMARY

For the midstream sector, $500 million of annual EBITDA serves as a boundary line between investment grade and below-investment grade. The Canadian and U.S. long-distance natural gas pipeline sector is an exception to this limitation, as the business has extremely low risk. Examples of investment grade rated small pipeline companies are the joint ventures Midcontinent Express Pipeline LLC (BBB-/Stable) and Ruby Pipeline, LLC (BBB-/Stable). At a $50 million future run-rate EBITDA pipeline, Portland is significantly smaller than these pipelines. Given the strength of this particular sub-sector of Midstream companies, size is not a constraint to the rating.

Portland is in the process of being transformed. As of Dec. 31, 2017, Portland had debt to EBITDA of approximately 1.0x, yet the majority of its contracts at that time were set to expire in March 2019. By November of 2020, based on management's construction plan, the project will have about double its Dec. 31, 2017 leverage, and, assuming successful construction, it will be fully long-term contracted. We derive Portland's rating by considering Portland in two time frames, (i) the execution risk that exists between now and November 2020, and (ii) and run-rate condition of Portland after November 2020.

Fitch's universe of single-natural gas transmission corporate credits range between Issuer Default Ratings (IDR) of 'BBB-' to 'BBB+'. Among that universe, none has a business development/construction plan as transformative as Portland's. We regard Portland's development/construction risk (including obtaining permits and authorizations, and managing potential litigation related thereto) as moderate. Development/construction risk is a factor in setting Portland's IDR at 'BBB'.

The rating is also set based on the expected success of Portland Xpress. Sabal Trail Transmission, LLC (Sabal; BBB+/Stable) is the best comparable for Portland, insofar as Portland and Sabal share two key drivers, which are very long-term contract coverage, and high-quality counterparties behind those contracts. Sabal's contracts have an average weighted life of approximately 25 years. Once Portland's contracts for Portland Xpress are all valid for their full amount (scheduled for late 2020), the weighted average life will be 17 years. Sabal and Portland's average length of contracts makes them equal in terms of this driver. Sabal's contract counterparties correspond to credit quality in the 'A' category (i.e., the range that includes A+, A, and A-). Fitch views Portland's contract counterparties, in aggregate, to have credit quality below the 'A' category.

Portland has had, and will have, extremely low leverage. Its past leverage is mainly an artefact of the restrictive amortizing project-style debt financing that was put on Portland over a decade ago. With an expected 2.0x leverage after the construction phase has ended, Portland's leverage compares extremely favorably to Sabal's mid-4x leverage once Sabal's main contract ramps up.

In summary, due to construction risk and the credit quality of the shipper group, Portland's rating is set at 'BBB' compared to Sabal's 'BBB+'.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

--Portland's fulfills its obligations in its long-term contracts with shippers, and no shipper defaults on any payments.

--The Portland Xpress project obtains returns that are consistent with "brownfield" projects in the Midstream industry.

--Libor is 3%.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

--If after the successful completion of Portland Xpress, the aggregate credit profile of the Portland shipper group has improved compared to the level currently, an upgrade is possible.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

--Debt to EBITDA sustained above 3.5x.

--Unexpected material construction-phase problems, including permitting/authorization/litigation problems.

LIQUIDITY

Liquidity on both a historical and pro forma basis is adequate. Post-close of its $125 million revolving credit facility in April 2018, Portland retired its $24.3 million of secured bonds using cash on hand. The facility currently remains undrawn, but is expected to be utilized to fund capital expenditures on the Portland Xpress expansion project, which is anticipated to cost a total of $80 million to $85 million. The facility may also be used to make distributions. In the unexpected case of a combination of draws for distributions plus cost overruns, the revolver has an accordion feature of $50 million. The facility's maturity of April 2023 is extendible by two 12-month periods with the consent of lenders. There is no schedule of commitment reductions or amortizations of outstanding loans. With minimal working capital requirements and few cash commitments apart from Portland Xpress, Fitch expects Portland to maintain a strong liquidity profile.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Portland Natural Gas Transmission System

--Long-Term IDR 'BBB';

--Senior unsecured rating 'BBB'.

The Rating Outlook is Stable.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Nov 26, 2018
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