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20 Apr 2011
Approximately $3 billion of debt securities affected
New York, April 20, 2011 -- Moody's Investors Service placed under review for possible downgrade
NGPL PipeCo LLC's (NGPL) Ba1 Corporate Family, senior unsecured
debt, and Probability of Default Ratings. Its Speculative
Grade Liquidity Rating is affirmed at SGL-3.
Moody's said that NGPL's near-term financial performance
appears weaker than the range incorporated into its current ratings.
The lower prospective financial metrics raise the potential that NGPL
will breach its revolver covenant over the next twelve months, further
testing its liquidity resources while it faces the maturity of $1.25
billion of notes (roughly 40% of its debt) in December 2012 and
the expiration soon after of its $100 million credit facility in
February 2013. NGPL's ability to effectively deal with these
challenges could be hampered by the ongoing dispute between its two owners
on the allocation of expenses.
"In addition to the already anticipated impact of the FERC mandated
rate reductions, NGPL's cash flow is being further pressured
by anemic gas market fundamentals in the Midwest and higher than expected
costs," said Moody's Vice President Mihoko Manabe.
In accordance with the Section 5 rate settlement with the Federal Energy
Regulatory Commission last year, NGPL's rates have been reduced
in phases. From the rates that were in effect as of April 2010,
NGPL's fuel retention factors were decreased by 30% in July
2010 and will be reduced by another 15% on July 1, 2011.
Transportation rates decreased by 3% in November 2010 and by another
2% at the beginning of this month. Storage rates decreased
by 3% in November 2010 as well.
NGPL has been experiencing an unexpected degree of decline in market-sensitive
revenues due to some negative conditions prevailing in the Midwest.
For example, demand for its park and loan service was down due to
reduced gas price volatility, and operational sales reflected lower
gas prices. Meanwhile, operating costs were higher than expected.
NGPL's EBITDA, as defined in its credit agreement, fell
by roughly 25% from $166 million in the December 2009 quarter
to roughly $125 million in the December 2010 quarter. This
decrease does not include the full annualized effect of the rate reductions
that occurred during this period, nor does it yet reflect the final
15% reduction in the fuel retention factor in a couple of months.
The extent of this decline exceeds the maximum 20% reduction in
cash flow that Moody's ratings had assumed from the mandated rate
As anticipated in Moody's last rating action, NGPL last November
obtained an amendment in its credit agreement to increase its debt-to-EBITDA
covenant limit from 5.5 times to 6.25 times. Based
on this ratio, NGPL's $3 billion of long-term
debt implies a minimum quarterly EBITDA of about $120 million,
which is close to the $125 million actual EBITDA achieved in the
December 2010 quarter which indicates that there is little headroom under
Kinder Morgan Kansas Inc. (rated Ba1 senior secured, the
20% indirect owner and operator of NGPL) and NGPL have not agreed
upon certain costs, including operations and maintenance and general
and administrative expenses, for the 2011 calendar year budget.
Arbitration proceedings are ongoing to determine future cost allocations.
In Moody's view, the dispute is a management distraction,
and if not resolved amicably in a timely manner, it could hinder
the optimal management of NGPL, which is already under financial
strain, as well as the near-term refinancing of obligations
within the Myria/NGPL organization.
NGPL's fiscal year ending June 2012 had already been expected to
be a down year just from the full year's impact of the rate reductions,
but it could prove to be weaker, given the adverse effects of shifting
gas flows in the Midwest from new shale gas supplies and recently constructed
pipelines amidst still feeble economic conditions. In the coming
weeks, Moody's will review NGPL's ability, given
its financial constraints, to contain the effects of these adverse
market conditions. Moody's will also reassess the impact
that the substantial debt at each of its owners has on NGPL's credit
quality. NGPL's corporate family rating could be downgraded
by at least a notch if the company appears unlikely to stabilize its financial
performance over the medium term, including funds flow from operations-to-debt
sustained below 8%. In the quarter ended December 2010,
annualized funds flow from operations-to-debt was 7.1%.
The rating could be stabilized at the current rating if NGPL resolves
its liquidity constraints and the owner disputes and obtains adequate
contracts that would stabilize its funds flow from operations-to-debt
in the 8% range.
On Review for Possible Downgrade:
..Issuer: NGPL PipeCo. LLC
.... Probability of Default Rating,
Placed on Review for Possible Downgrade, currently Ba1
.... Corporate Family Rating, Placed
on Review for Possible Downgrade, currently Ba1
..Issuer: NGPL PipeCo. LLC (Old)
....Senior Unsecured Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Ba1
..Issuer: NGPL PipeCo. LLC
....Outlook, Changed To Rating Under
Review From Stable
The last rating action was on July 29, 2010, when Moody's
downgraded NGPL to Ba1 from Baa3 and assigned a Loss Given Default Rating
of LGD 4 - 50% to the Ba1 notes, a Corporate Family
Rating of Ba1, a Probability of Default Rating of Ba1, and
a Speculative-Grade Liquidity rating of SGL 3, and assigned
a stable outlook.
The principal methodology used in this rating was Moody's Natural
Gas Pipeline Rating Methodology, published in December 2009 and
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published June 2009.
NGPL PipeCo LLC is a holding company for Natural Gas Pipeline Company
of America and other interstate natural gas pipeline assets. NGPL
is 80% owned by Myria Acquisition LLC and 20% indirectly
owned and operated by Kinder Morgan Kansas Inc., a subsidiary
of Kinder Morgan, Inc., based in Houston Texas.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's reviews NGPL PipeCo for possible downgrade
250 Greenwich Street
New York, NY 10007
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