DBRS Confirms Express Pipeline Limited Partnership & Express Pipeline LLC at A (low) and BBB (low)

DBRS has today confirmed the ratings of A (low) and BBB (low), with Stable trends, on the Senior Secured Notes (Senior Debt) and Subordinated Secured Notes (Subordinated Debt; collectively, the Notes) issued jointly and severally by Express Pipeline Limited Partnership & Express Pipeline LLC (collectively, Express) and guaranteed by Platte Pipe Line Company (Platte). All of the ratings are supported by the combined strength of Express and Platte (collectively, Express System) through the latter’s guarantee of the former’s obligations. Consequently, Express System forms the basis of DBRS’s financial analysis for this credit.

The confirmations reflect DBRS’s view that Express System’s business and financial risk profile will remain stable over the medium term despite the fact that firm contracts covering 40% of throughput capacity on Express expire on March 31, 2012 (reducing committed capacity from 82% to 42%). DBRS expects that much of the associated volume will continue to flow on Express, with any decrease in volumes offset by much higher uncommitted tolls, mitigating the impact on net income and cash flow as long-term supply/demand trends support the importance of Western Canada Sedimentary Basin (WCSB) crude oil shipments to the U.S. Rocky Mountains (PADD IV) and Midwest (PADD II) regions. While Platte continues to rely on uncommitted volumes for throughput and revenue, relatively strong throughput on Express over the past few years has had a positive impact on Platte volumes.

The subordinated debt is rated three notches lower than the senior debt for the following reasons: (1) the much weaker overall debt service coverage ratio (DSCR) (1.94 times) compared with the senior debt DSCR (4.14 times) for the 12 months ended March 31, 2011 (LTM March 2011), due to the significant level of senior debt that ranks in priority to subordinated debt ($124.5 million and $171.2 million, respectively, at March 31, 2011), and (2) failure to pay interest or principal on the subordinated debt will not result in an Event of Default under the Trust Indenture as long as any senior debt is outstanding.

The $110 million of Senior Secured Notes due 2020 have a bullet maturity and therefore creditors do not benefit from principal amortization over time, as was the case with the original debt issues. DBRS assigned the same rating to the non-amortizing issue as assigned to the Senior Secured Notes due 2013 based on (1) identical security, (2) declining total debt outstanding as the initial Notes fully amortize over time ($14.5 million remaining of original $150 million principal at March 31, 2011) and (3) the April 2005 expansion completion of Express throughput capacity (to 280,000 barrels per day (b/d) from 172,000 b/d) resulted in Express System becoming a more competitive entity than previously.

Additional rating factors include the following:

(1) DBRS believes that Express will remain the major crude oil pipeline from the WCSB to PADD IV, providing needed crude oil supply to refineries in that region. (a) The Express toll to Casper, Wyoming ($1.45 per barrel for committed shippers and $2.06 per barrel for uncommitted shippers) is much lower than for the smaller alternative pipelines. (b) The combined toll for shipping light crude oil on the full Express System to Wood River, Illinois is $1.85 per barrel for committed shippers and $3.80 per barrel for uncommitted shippers. This compares very well with the tolls of competing pipelines, including Enbridge Pipelines Inc.’s Mainline/Lakehead System (low-to-mid-$4 per barrel range) and TransCanada PipeLines Limited’s Keystone Pipeline (high-$4 per barrel range for committed shippers), Phase 1 of which was placed into commercial operation on June 30, 2010. Recent throughput declines on Express (174,800 b/d in Q1 2011 compared with an average of 200,700 between 2008 and 2010) is largely attributable to ramp up of volumes on Phase 1 of the Keystone Pipeline.

(2) Express System’s financial profile has improved as ongoing debt reduction has supported modest balance sheet leverage improvement (debt-to-capital ratio of 55% at March 31, 2011 compared with 61% at year-end 2007), strong profitability and improving coverage ratios. DSCR has exceeded 1.8 times since 2008 (1.94 times for the LTM March 2011 compared with 1.75 times in 2007) and cash flow-to-total debt has exceeded 20% since 2008 (27.3% for LTM March 2011 compared with 17.1% in 2007).

(3) Full servicing of all of the Notes requires either re-contracting of expiring capacity or a higher proportion of uncommitted volumes in future years. In addition, the last shipper contract expires in September 2015, more than four years before the last debt issue matures in January 2020. Consequently, Express System faces refinancing risk on the non-amortizing $110 million Senior Secured Notes due 2020, whereas the other debt obligations are fully amortizing. DBRS estimates that, even in the unlikely event that the Express contracts are not renewed and volumes drop to 40% of capacity (compared with 62% in Q1 2011 and 71% in 2010), Express System would still be able to meet its debt service obligations under the scheduled amortization through 2020, given the much lower debt levels in future years. Therefore, DBRS expects these issues to be manageable due to the strong competitive positions of Express and Platte, as well as the long-term demand for crude oil in their markets.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies , which can be found on our website under Methodologies.