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Rating Action:

Moody's downgrades Rockies Express to Ba2; outlook is stable

14 Dec 2020

$2.6 billion of rated debt affected

New York, December 14, 2020 -- Moody's Investors Service, ("Moody's") downgraded Rockies Express Pipeline LLC's (REX) Corporate Family Rating (CFR) to Ba2 from Ba1, its Probability of Default Rating (PDR) to Ba2-PD from Ba1-PD and the unsecured notes rating to Ba2 from Ba1. REX's rating outlook is stable.

"REX's ratings downgrade reflects the weakened counterparty credit strength of its customer base and the high financial leverage and fundamental challenges faced by its 75% owner, Prairie ECI Acquiror LP," commented Sreedhar Kona, Moody's senior analyst. "REX's still moderate debt leverage and strong east to west contract coverage backed by Appalachian production supports its stable outlook."

Debt List:

Issuer: Rockies Express Pipeline LLC

... Corporate Family Rating, Downgraded to Ba2 from Ba1

.... Probability of Default Rating, Downgraded to Ba2-PD from Ba1-PD

..Senior Unsecured Notes, Downgraded to Ba2 (LGD4) from Ba1 (LGD4)

Outlook Actions:

..Issuer: Rockies Express Pipeline LLC

....Outlook, Remains Stable

RATINGS RATIONALE

REX's CFR downgrade to Ba2 is driven by the sustained overall deterioration of its counterparty average credit profile. The bankruptcy filings by REX's west-to-east counterparty Ultra Resources Corp (ratings withdrawn) and its east-to-west counterparty Gulfport Energy Corporation (ratings withdrawn) put some portion of REX's cash flow at risk. The downgrade of REX's parent Prairie ECI Acquiror LP (B1 stable), which indirectly owns 75% of REX was also a factor in REX's downgrade. While REX is 25% owned by Phillips 66 Company, a subsidiary of Phillips 66 (A3 negative), and that company has important participatory rights in key financial decisions, Prairie's dependence on REX's cash flows has only increased and Prairie's ability to take supportive actions like reducing debt at REX is unlikely for the medium term.

REX's Ba2 CFR benefits from its fully contracted east-to-west capacity, and partially contracted west-to-east capacity, which will enable the company to maintain its cash flow coverage of its moderate debt burden. While REX's credit metrics are relatively strong, its credit profile is constrained by its customer base and their credit quality. The pipeline's customers are almost entirely comprised of E&P companies, or 'supply-push' customers, that are directly exposed to commodity prices. The credit quality of this customer base, specifically the east-to-west customers, has declined significantly through 2020 due to challenged natural gas fundamentals. While natural gas prices and fundamentals have rebounded recently, the average customer credit quality of REX's customers has durably declined and is still lower than REX's Ba2 ratings. REX's relatively low debt leverage, good customer diversification, connectivity to the prolific Appalachian Basin and reasonably priced transportation contracts provide some offset to the risks from its customer credit quality. Moody's forecasts REX's debt/EBITDA at the end of 2020 to be 3.7x and improving slightly through 2021, attributable to modestly improved cash flow from higher throughput volumes and cash flow due to Cheyenne hub gas volumes.

REX's stable outlook reflects the company's predictable cash flow, strong east-to-west contract coverage and low debt leverage. It is also supported by the stable outlook on Prairie.

REX will maintain good liquidity, reflecting consistent cash flow generation and no near term debt maturities. As of September 30, 2020, the company had a cash balance of $4 million and $9 million outstanding under its $150 million senior unsecured revolving credit facility maturing in November 2024. Based on capital spending guidance, REX should generate positive free cash flow after covering interest expense and capital spending. The revolving credit facility contains one financial covenant consisting of a maximum debt / EBITDA set at 4.5x. The company will remain in compliance with this covenant. The REX limited liability company agreement provides that cash in excess of that required to operate the business is distributed to owners, leaving the company with nominal cash balance. REX first maturity after its revolver is $400 million of senior notes maturing in 2025.

REX's senior unsecured notes are rated Ba2, the same as the company's Corporate Family Rating (CFR). The senior unsecured notes are rated at the same level as the CFR because the company's long-term debt, which includes a $150 million revolving credit facility, is all unsecured.

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

REX's ratings could be considered for an upgrade if the company's customer credit quality improves significantly and a higher portion of its west-to-east capacity is re-contracted with creditworthy counterparties for longer terms. In addition to REX's stand-alone credit profile improving, an upgrade of Prairie would be supportive of considering an upgrade at REX.

An increase in financial leverage or a meaningful decrease in interest coverage could lead to a ratings downgrade. If Debt/EBITDA is sustained above 5x or there is a significant deterioration in customer credit quality then the ratings could be downgraded. A downgrade of Prairie could also pressure REX's ratings.

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.

REX owns a 1,712 mile interstate natural gas pipeline system that reaches from the Rocky Mountains area of Wyoming and Colorado to Ohio. REX is owned 75% by Tallgrass Energy Partners (TEP) and 25% by Phillips 66 Company, a subsidiary of Phillips 66 (A3 negative).

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_1243406.

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.

Sreedhar Kona
Vice President - Senior Analyst
Corporate 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

Steven Wood
MD - Corporate Finance
Corporate 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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