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REX Ratings Cut on Marcellus/Utica Shale Cloud

Fitch Ratings last week cut the debt ratings on Rockies Express Pipeline LLC (REX) and revised its outlook on the pipeline's debt to "negative" from "stable" due to pushback from Marcellus and Utica shale gas supplies, which have cut the value of long-haul transportation capacity on REX from the Rockies to the East.

Fitch downgraded the issuer default rating (IDR) and senior unsecured debt for (REX) to "BBB-" from "BBB" and the company's short-term IDR to "F3" from "F2". A total of $3 billion of long term debt is affected by the rating action.

"Growing Marcellus and Utica shale production on the east end of the REX system will likely diminish the value of long-haul capacity from the Rockies to the east part of the system and hinder REX's ability to recontract capacity in 2019 at current rates," Fitch said. "During the winter months of 2012, system utilization dropped to approximately 70% after running mostly full from the time REX became operational. While in theory, REX could take advantage of changing markets by connecting with Marcellus and Utica supplies to backhaul to the Midwest, the construction of pipeline laterals could require a significant financial commitment. Without specific projects with firm shipper support, any potential benefits from organic growth opportunities cannot be relied on."

Additionally, Fitch said the sale by Kinder Morgan Energy Partners LP of its 50% stake in REX "adds to the near-term uncertainty." The sale is a requirement of the Federal Trade Commission for antitrust clearance of Kinder Morgan Inc.'s (KMI) acquisition of El Paso Corp. KMI management is well aware of the Marcellus/Utica factor weighing on REX and said backhauls are an attractive (see NGI, Jan. 30).

In fact, according to Tudor, Pickering, Holt & Co.'s Bradley Olsen, the Marcellus is turning out to be a glass-half-full story for REX. "REX is now hauling substantial amounts of Marcellus gas westbound toward Chicago through an interconnect with Spectra's TETCO [Texas Eastern Transmission Co.] system, which lies across the western portion of the Marcellus," Olsen wrote in a note in March (see NGI, March 19). He noted that the end of the REX pipe lies above the Utica Shale, where upstream activity is quickly gathering pace.

On the plus side for REX, Fitch said, are stable revenues generated under 10-year firm shipper contracts with a 7.3-year average remaining life; moderate counterparty exposure with the majority of volumes committed to creditworthy shippers; low regulatory risk with Federal Energy Regulatory Commission-approved transportation rates fixed through 2019; a pipeline route with 31 delivery interconnections that provides shippers significant market flexibility; minimal liquidity requirements; and safety and environmental concerns lower than for most pipelines.

Fitch said that while REX debt is higher than average, cash flows are "extremely strong" and revenues through 2018 are "very predictable." In fact, the pipeline's cash position compares favorably with higher-rated corporate-owned interstate pipelines, Fitch said. "However, future participation in large organic growth projects to access Marcellus and Utica production could require significant funding and change REX's financial profile," the ratings agency said.

"Possible catalysts for negative rating actions include a weakening of market conditions for REX capacity that will likely make capacity recontracting more difficult or a change in operating strategy that elevates risk," Fitch said. "Possible catalysts for positive rating actions include improving market conditions for capacity renewal on REX or contractually supported organic growth projects that increase the value of capacity and/or improve credit metrics."

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