Fitch Ratings has affirmed Tallgrass Energy Partners, LP's (Opco) Long-Term Issuer Default Rating (IDR) at 'BB-'.
Fitch has also affirmed the Opco's senior unsecured rating at 'BB-'/'RR4', and senior secured rating at 'BB+'/'RR1'. The Rating Outlook has been revised to Stable from Negative.
Fitch has assigned a 'BB-'/'RR4' rating to the Opco's and co-obligor Tallgrass Energy Finance Corp.'s proposed issuance of senior unsecured notes.
Fitch has affirmed Prairie ECI Acquiror LP's (Prairie ECI Acquiror LP, as borrower under the Term Loan B, and Tallgrass Energy, LP, as pledgor in the Term Loan B structure are referred to collectively as, Holdco) IDR at 'B+'. The Outlook has been revised to Stable from Negative.
Fitch has applied its updated 'Corporates Recovery Ratings and Instrument Ratings Criteria' and as a result, has downgraded Holdco's senior secured term loan rating to 'B-' from 'B' and revised the Recovery Rating (RR) to 'RR6' from 'RR5.' The Holdco IDR, loan rating and RR have been removed from Under Criteria Observation (UCO), where they were placed following the publication of the updated recovery rating criteria on April 9, 2021.
Fitch revised Holdco's and Opco's Outlooks to Negative in 2020 due to a trend of credit downgrades to certain single-B category customers holding long-term contracts with Rockies Express LLC (ROCKIE; BB+/Stable), a similar concern about some Pony Express pipeline (Pony) customers. The revision of the Outlooks to Stable reflects upswings in both customer credit quality and spot transportation rates.
KEY RATING DRIVERS
Counterparty Credit Risk: In 2020, and year-to-date, Pony did not have a material customer declare bankruptcy. ROCKIE did have some customer bankruptcies in the years prior to 2021. The Gulfport bankruptcy, which was ROCKIE's largest, resulted in an outcome neutral to credit quality. Going forward, ROCKIE's biggest source of total revenues in the forecast period is from its East End customers. Among the largest of these customers, all are rated (senior unsecured) below investment grade.
Accordingly, ROCKIE remains exposed to events that could cause customer distress. Fitch has accounted for this risk by assuming in its Tallgrass base case that a small volume customer in the East End files for bankruptcy. Positively, since the beginning of 2021, two of the top four East End customers have been upgraded by Fitch.
Long-term Contracts: Both of Tallgrass's two large interstate pipeline operations benefit from long-term contracts. The terms give high assurance of run-rate cash flows even if delivered volumes are significantly below the contract entitlement. ROCKIE enjoys take-or-pay payment terms. Weighted average contract life is 10-years. Pony, which Opco recently contributed as part of the formation of a joint venture with Bridger Pipeline LLC, has as its main payment term minimum volume commitments (MVCs).
On a cash basis, MVC-type contracts operate materially like take-or-pay contracts, provided volumes delivered in a certain period do not exceed the contractual minimum. Pony has enjoyed a long history of total volumes exceeding the sum of its MVC contract minimums. Part of Pony's success with volumes is providing MVC counterparties with volume incentive rates for volumes over the minimum. The new Pony joint venture's capital structure in the next couple years is expected to lead to an adequate amount of joint venture dividends going to Opco, thereby supporting credit quality.
Leverage: In 2020, Holdco leverage (proportionate-for-joint ventures consolidated basis) was over slightly 8.0x, a level that pressured the 'B+' IDR. In mid-2020, Holdco adopted a plan to reduce Opco debt, among other prudent financial policies. Solid business execution in the last 12 months has caused Holdco LTM June 30, 2021 leverage to drop to approximately 7.5x. Fitch expects 2021 and 2022 year-end leverage to be in the 7.5x area. Leverage reduction has been aided by the glide-down in growth investments, with 2020 being lower than 2019, and 2021 lower than 2020.
Parent Subsidiary Linkage Criteria and ESG: Per Fitch criteria, Holdco and Opco exist in a strong subsidiary/weak parent relationship. Operational and legal matters are not strong. There is no centralized treasury, Opco has its own revolving credit facility, while Holdco at March 31, 2021 had unrestricted cash for an amount that was higher than needed to make its next few quarterly debt service payment, and TEP does not guarantee the debt of Holdco. Holdco and Opco each have ESG Scores of '4' for 'Group Structure' due to the complicated family structure. For instance, cash held above the Opco level is held at more than one entity in the financing structure.
DERIVATION SUMMARY
Fitch's Parent Subsidiary Linkage Criteria serves as the basis of the derivation analysis, and, accordingly, puts the focus on Holdco. Holdco's comparable is The Williams Companies, Inc. (WMB; BBB/Stable). Like Holdco, WMB's core credit is comprised of two long-distance pipelines regulated by the U.S. Federal Energy Regulatory Commission (FERC). Both of WMB's FERC-regulated subsidiaries are stronger regarding fundamentals, than Holdco's strongest comparable subsidiary. This element of the comparison is offset by WMB having a much larger gathering and processing business than Tallgrass. G&P is a higher risk business than FERC-regulated pipelines.
Fitch expects Williams to have 2021 total debt-to-EBITDA of approximately 4.6x (standard definition as levered joint ventures are not substantial, as with Prairie ECI Acquiror LP) As noted, Fitch expects Holdco leverage of approximately 7.5x in 2021-2022 (proportionate consolidated method). The two families (Williams Companies, Inc. and the Tallgrass family) are separated in ratings by a large amount, due the leverage and size of each family.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Fitch Price Deck, e.g., West Texas Intermediate for 2022 at $52/barrel, and Henry Hub 2022 and out, $2.45/thousand cubic feet;
ROCKIE distributions and EBITDA consistent with Fitch's expectations for ROCKIE, which, among other things, reflect one small generic customer rejecting contracts in bankruptcy in the out years;
Pony volumes are approximately the same as the level that has prevailed in recent months;
Minimal growth capex and growth joint venture investments;
Distributions to equity by both Opco and Holdco for the balance of 2021 are consistent with distributions YTD March 31, 2021;
LIBOR of 25 bps;
The Recovery Rating of '6' for Holdco's Term Loan B is based on a scenario where Opco is in financial distress along with Holdco. The going-concern proportionate EBITDA upon a 2022 emergence is an assumption of $750 million. The previous assumption was $800. The reduction in the going-concern EBITDA reflects an updated view on the non-ROCKIE part of the Tallgrass family. The multiple assumed is 8.0x, which is properly at a substantial discount with M&A multiples (as averaged together) for the types of interstate pipelines that make up the largest assets in the Tallgrass family. The previous multiple was 9.0x. This 9.0 multiple is also well supported by M&A multiples, but the revision in criteria mentioned in the first section above caps multiples at 8.0x.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
For both Opco and Holdco, proportionate consolidated Total Debt-to-Adjusted EBITDA (measured at the Holdco level) that is below and expected to remain below 7.0x for a sustained period;
For both Opco and Holdco, a decrease in business risk, such as might occur with ROCKIE and/or Pony contracting a significant part of their capacity in a long-term revenue-assured relationship with an investment grade shipper.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
For both Opco and Holdco, proportionate consolidated total debt-to-adjusted EBITDA (measured at the Holdco level) that is expected to be above 8.0x for a sustained period;
For both Opco and Holdco, a large customer with a long-term take or pay (ROCKIE) contract or MVC (Pony) contract has a financial condition that is consistent with a potential bankruptcy filing, and the current market for the Opco's transportation service indicates the potential for a contract rejection.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Holdco
Liquidity Adequate: Liquidity needs at Prairie ECI Acquiror LP are expected to be limited to interest payments, relatively small debt amortization, and, in the event the Opco-Holdco distribution policy reverts to past practice (not expected in the near-term by Fitch) distributions to owners. Fitch expects distributions from Tallgrass Energy Partners, LP to be supportive of Prairie ECI Acquiror, LP's ability to meet its debt service obligations and its minimum debt service coverage ratio covenant of 1.1x.
In Fitch's view, liquidity is also supported by a significant amount of unrestricted cash at Holdco for future interest payments. As of March 31, 2021, the borrowing amount under the term loan was $1.48 billion.
Opco:
Liquidity Adequate: Opco's revolving credit facility amount has been considerably reduced since March 31, 2021 at which point it was $2.3 billion. On July 19, 2021, Opco and certain of its subsidiaries entered into an amendment to its existing revolving credit facility. The amendment modified certain provisions of the credit agreement to, among other things, decrease the gross commitment in the Opco revolving credit facility to $1.5 billion, and increase maturity of the revolver to July 19, 2025 from 2022.
The amendment made no changes to the maintenance covenant array of maximum total leverage ratio of not more than 5.5x, senior secured leverage ratio of not more than 3.75x, and consolidated interest coverage ratio of not less than 2.5x.
As of June 30, 2021, pro forma for the reduction in the revolving credit facility commitment, Opco had availability of $1.0 billion. At June 30, 2021, the company was in compliance with its covenants. Opco currently has five series of senior unsecured notes outstanding with maturity dates 2024, 2025, 2027, 2028 and 2030. Opco's recent proposed issuance will be used to fund a tender offer for Opco's notes due 2024. Fitch believes Opco's near-term maturity obligations are manageable.
ESG CONSIDERATIONS
Prairie ECI Acquiror LP and Tallgrass Energy Partners, LP have ESG Relevance Scores of '4' for Group Structure due to the high number of entities in the family. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
ISSUER PROFILE
The Tallgrass family is a U.S. midstream company with a concentration in long-distance interstate pipelines.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch typically adjusts midstream energy companies' EBITDA to exclude equity in earnings of unconsolidated affiliates, but include cash distributions from unconsolidated affiliates. For additional perspective, Fitch evaluates TEP and Holdco relative to its proportionate consolidation-based leverage, which includes pro rata EBITDA and pro rata debt of joint ventures.
For Opco and Holdco, in addition to calculating leverage metrics inclusive of ROCKIE and Pony distributions as described above, Fitch has also proportionately consolidated ROCKIE in Opco's and Holdco's leverage calculations to include 75% of ROCKIE EBITDA and debt in Opco and Holdco's metrics, amounts proportional to their ownership interest in the pipeline. (Pony EBITDA is handled similarly, though with a percentage that will vary as the joint venture's capital structure changes in accordance with its terms.) Further, for ROCKIE's EBITDA, Fitch adds to operating income changes in the Contract Asset account. Lastly, Fitch reviews Holdco's stand-alone leverage, but Fitch does not use this metric in its Rating Sensitivities.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
Tallgrass Energy Partners, LP LT IDR BB- Affirmed BB-
senior unsecured
LT BB- New Rating RR4
senior unsecured
LT BB- Affirmed RR4 BB-
senior secured
LT BB+ Affirmed RR1 BB+
Prairie ECI Acquiror LP LT IDR B+ Affirmed B+
senior secured
LT B- Downgrade RR6 B
Tallgrass Energy Finance Corp.
senior unsecured
LT BB- New Rating RR4
senior unsecured
LT BB- Affirmed RR4 BB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
APPLICABLE CRITERIA
Parent and Subsidiary Linkage Rating Criteria (pub. 26 Aug 2020)
Corporate Rating Criteria (pub. 21 Dec 2020) (including rating assumption sensitivity)
Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity)
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ENDORSEMENT STATUS
Prairie ECI Acquiror LP EU Endorsed, UK Endorsed
Tallgrass Energy Finance Corp. EU Endorsed, UK Endorsed
Tallgrass Energy Partners, LP EU Endorsed, UK Endorsed
WILLIAMS COMPANIES 
