Moody’s Investor Service on Wednesday said it was changing its outlook for Rockies Express Pipeline LLC (REX) from “stable” to “negative,” citing concerns over a possible decline in the natural gas pipeline company’s earnings in late 2014 and its long-term competitiveness.
The credit ratings analyst affirmed at “Ba1” REX’s corporate family rating.
“The negative outlook for [REX] reflects high leverage and the potential for earnings declines in late 2014 when about 10% of its capacity is likely to require recontracting,” said Moody’s vice president Pete Speer. “With the recent acquisition by Tallgrass Energy Partners [LP] and the uncertainties regarding [REX’s] earnings power post 2019, leverage reduction is necessary to support REX’s existing ratings.”
Last month Tallgrass paid $1.8 billion to purchase Kinder Morgan Energy Partners LP’s (KMP) 50% interest in REX, as well as Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Co., KMP’s Casper-Douglas natural gas processing and West Frenchie Draw treating facilities in Wyoming (see Daily GPI, Nov. 14). Including REX’s debt, the deal is worth an estimated $3.3 billion.
“The [Tallgrass] sale…indicated that REX’s current fair value is less than its cost to build,” Moody’s said. “This further validated [our] concerns regarding the future tariffs that REX will receive when its original customer contracts expire in 2019. In addition, this transaction replaced KMP as a sponsor and operator with a lower rated private equity sponsored entity with a limited operating track record.”
Subsidiaries of Sempra Energy and Phillips 66 each own a 25% stake in REX (see Daily GPI, Aug. 8). The once highly anticipated gas system stretches 1,679 miles from Rio Blanco County, CO, to Monroe County, OH, and has 1.8 Bcf/d of capacity. It came into service about three years ago, just as the Marcellus Shale began moving into high gear for natural gas producers.
Moody’s said REX’s competitive position would be adversely affected by increasing gas production in the Marcellus Shale, and it said it was concerned that $500 million of the company’s debt is scheduled to mature in July.
“Given [our] concerns regarding a potential decline in earnings in late 2014 and REX’s long-term competitiveness, a reduction in financial leverage to below five times is necessary to support REX’s ‘Ba1’ ratings,” Moody’s said. “If debt/EBITDA [earnings before interest, taxes depreciation and amortization] isn’t reduced below five times through debt repayment or earnings increases, then the ratings could be downgraded to ‘Ba2.’ These credit issues make a rating upgrade unlikely over the next two years.”
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