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 due 2020 (Senior Notes) and Subordinated Secured Notes due 2019 (Subordinated Notes; collectively, the Notes), respectively, 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 the credit analysis.

The confirmations reflect DBRS’s view that Express System’s business and financial risk profile remain consistent with the current ratings, despite the fact that firm contracts covering 40% of throughput capacity on Express expired on March 31, 2012, reducing committed capacity from 82% to 42.5%. 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 and rising U.S. domestic crude oil production continues to have a positive impact on Platte volumes.

The longest-dated Express shipper contract expires in September 2015. Consequently, Express System faces refinancing risk on the non-amortizing $110 million Senior Notes due 2020, whereas the Subordinated Notes due 2019 are fully amortizing to a final payment at year-end 2017. DBRS estimates that, even in the unlikely event that none of the recently expired Express contracts are renewed and volumes drop to 40% of capacity (compared with 67% in Q1 2012 and 63% in 2011), Express System would still be able to meet its debt service obligations given the much lower debt service in future years.

The Subordinated Notes are rated three notches lower than the Senior Notes for the following reasons: (1) the much weaker overall debt service coverage ratio (DSCR) (2.51 times (x)) compared with the Senior Notes DSCR (5.60x) for the 12 months ended March 31, 2012 (LTM March 2012), due to the significant level of Senior Notes that rank in priority to Subordinated Notes ($110.0 million and $155.2 million, respectively, at March 31, 2012) and (2) failure to pay interest or principal on the Subordinated Notes will not result in an Event of Default under the Trust Indenture as long as any Senior Notes are outstanding.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.