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Rating Action:

Moody's downgrades Southeast Supply Header to Ba1; outlook negative

01 Oct 2020

Approximately $400 million senior unsecured debt affected

New York, October 01, 2020 -- Moody's Investors Service, ("Moody's") downgraded the senior unsecured rating of Southeast Supply Header, LLC (SESH) to Ba1 from Baa3. Concurrently, Moody's assigned a Ba1 Corporate Family Rating (CFR), a Ba1-PD probability of default (PD) rating, and a Speculative Grade Liquidity (SGL) rating at SGL-2. The rating outlook is negative. This rating action concludes the review for downgrade initiated on 31 July 2020.

RATINGS RATIONALE

"SESH's rating downgrade reflects the expiration of its largest capacity contract," stated Edna Marinelarena, Moody's analyst. "Approximately 50% of the pipeline's capacity is uncontracted leading to more volatile revenue and cash flow production with the ratio of FFO to debt weakening materially in 2021."

The Ba1 CFR reflects the uncontracted nature of the pipeline. SESH's financial metrics had been strong thanks to the contracted nature of the pipeline's revenues that are based on fixed rate payments irrespective of volumes shipped. Most of the executed contracted rates were set in 2008, when the pipeline originally came online during a period of high natural gas prices. However, over the years, the pipeline's competitive position has weakened as natural gas prices have fallen, substantial new supply has been added from shale gas regions and additional pipeline capacity has been built to serve the critical Florida market. These dynamics are evident in SESH's failure to extend its largest contract, a 500,000 dekatherms (Dth) per day contract with Florida Power & Light Company (FPL, A1 stable), which was the pipeline's largest contract at about 50% of pipeline capacity and revenue in 2019. The company has thus far been unable to secure a contract with another high-quality shipper for either a portion or for the full capacity available.

The company remains in a period of significant recontracting risk as the original 2008 contracts expire or near their two-year notification period. In 2021 SESH, has contracts that are nearing their two year notification date, including contracts with Duke Energy Florida, LLC (A3 stable) and FPL, which the company reports making good progress towards renewal. Positively, the balance of the pipeline's shippers continue to be other highly rated utility companies of which operate in service territories with growing natural gas demand driven by population growth and power generation fleet conversions to natural gas from coal, which should support the pipeline's credit quality longer term.

While negotiations with FPL and other shippers are ongoing, the inability to recontract a large portion of the available capacity raises the level of credit risk associated with the pipeline. We expect SESH to experience revenue volatility over the next 12 months as the company navigates markets sales for its available capacity. Additionally, we expect any new contract to be at lower pricing than the original 2008 contracted rates resulting in less revenue generation.

SESH's cash flows are falling. The ratio of FFO to debt as of LTM Q2 2020 was 15.5%. We expect FFO to debt will decline close to 13% in 2020 due to the loss of the FPL contract. Over the next 12 months, FFO to debt will be volatile and, based on our scenario analysis, we forecast the ratio to range between 6% and 10% assuming 50% to 100% of volumes sold. A more stressed scenario shows FFO to debt could drop to 3% should the company's utilization materially decline resulting in only 25% of available capacity. These weak credit metrics further assume no parent level support.

The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We expect SESH to be resilient to recessionary pressures related to the coronavirus because half its revenue is generated from contractual agreements with pipeline shippers and Florida's reliance on natural gas for power generation. Nevertheless, we continue to evaluate possible long-term impacts of the virus, such as on contract renegotiations. As the events related to the coronavirus unfold, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios.

Environmental, social and governance considerations incorporated into our credit analysis for SESH are primarily related to carbon regulations and social risks related to health and safety and demographic and societal trends. From an environmental perspective, we view the natural gas pipeline sector as having low exposure to carbon transition risks. In addition, we believe the pipeline sector has moderate exposure to social risks. From a governance perspective, financial strategy and risk management are key considerations, although the pipeline's financial policies are established by its respective owners.

The SGL-2 reflects the company's good liquidity for the next 12 to 18 month and lack of external liquidity. SESH is expected to maintain about $30 million in unrestricted cash balance and is expected to generate about $50 million in cash flow, which has been sufficient to meet its obligation including capex. Similar to most of its peers in the natural gas pipeline sector, SESH does not have an external bank revolving credit facility and dividends its free cash flow to its sponsors. With only $400 million of unsecured debt, we think alternate liquidity sources could include the ability to pledge security if necessary.

Outlook

The negative outlook reflects the uncertainty surrounding the pipeline's utilization and volume risk that if decline could lead to very weak financial metrics. The outlook further incorporates the uncertainty around any new agreement, or various agreements, that may be reached over the medium-term, as it relates to tenor, price and quality of the shippers. The outlook could return to stable if the pipeline's utilization remains consistent with historic levels and sales produce sufficient revenue to maintain an FFO to debt in the 10% range.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

Although unlikely over the next 12 to 18 months, a rating upgrade could occur if SESH contracts the majority of its available capacity, either with one or multiple high rated shippers, for a period of time that would lead to predictable cash flow generation over the long-term and sufficient to sustain an FFO to debt above 13%.

Factors that could lead to a downgrade

The rating could be downgraded if the pipeline's utilization declines below 80% or if FFO to debt falls below 9%.

SESH is a 287-mile header system with approximately 1.1 Bcf/d transportation capacity extending from northern Louisiana, through Mississippi and into Alabama where it interconnects with the Gulfstream Natural Gas System L.L.C. (Baa2 stable). SESH is a joint venture owned 50% by a wholly owned subsidiary of Enbridge Inc. (Baa2 positive) and 50% by affiliates of Enable Midstream Partners, LP (Baa3 stable).

Assignments:

..Issuer: Southeast Supply Header, LLC

.... Corporate Family Rating, Assigned Ba1

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

Downgrades:

..Issuer: Southeast Supply Header, LLC

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa3

Outlook Actions:

..Issuer: Southeast Supply Header, LLC

....Outlook, Changed To Negative From Rating Under Review

The principal methodology used in these ratings was Natural Gas Pipelines published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113727. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edna Marinelarena
Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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