Standard & Poor’s Ratings Services (S&P) lowered its corporate credit and senior unsecured debt ratings on Rockies Express Pipeline LLC (REX) to “BB” from “BBB-” with a “stable” outlook and said the decision was based on compressed basis differentials leading to increased recontracting risk in the years ahead.

“We base the ratings downgrade on sustained compression in low natural gas basis differentials, which heightens recontracting risk primarily in 2019 and to a lesser extent in 2014, combined with somewhat aggressive financial metrics,” said S&P credit analyst William Ferara. “The recontracting risk could result in substantially lower cash flows when the vast majority of existing contracts expire in 2019 (with about 10% of capacity due in late 2014).

“The emergence of the Marcellus Shale, which is located very close to the same markets REX is currently serving, is diminishing the value of shipping gas west to east, although we recognize that the pipeline could reverse flows (east to west) to generate more value.”

As of Sept. 30, REX had about $3 billion of total reported debt, according to S&P.

The pipeline’s three owners are Kinder Morgan Energy Partners LP, 50%; Sempra Energy, 25%; and ConocoPhillips, 25%.

During a conference call last week with financial analysts, Tom Martin, president of Kinder Morgan’s natural gas pipelines, said that while fully contracted, REX had seen its volumes wavering from their previous 1.8 Bcf/d to as low as about 1 Bcf/d (see Daily GPI, Jan. 26).

There has been “a lot of discussion” about the impact of the Marcellus and Utica shales on the pipeline, Martin said.

“The stable outlook reflects our expectation of stable cash flows and debt leverage metrics due to existing contracts,” Ferara said. “We expect basis differentials to remain narrow, however. While the remaining contract life limits the potential that we will lower the ratings notably in the near term, we could do so over time if we become increasingly confident that the narrow basis environment will cause materially lower recontracting rates in 2019.”

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