Tallgrass Energy Partners, LP #BB+# Ratings Affirmed On Structural Simp Outlook Revised To Positive

Stocks and Financial Services Press Releases Wednesday June 13, 2018 09:14
NEW YORK--13 Jun--S&P Global Ratings

NEW YORK (S&P Global Ratings) June 12, 2018--S&P Global Ratings today affirmed its 'BB+' corporate credit and issue-level ratings on Tallgrass Energy Partners LP and revised the outlook to positive from stable. The '3' recovery rating is unchanged, indicating our expectation for meaningful recovery (50% to 70%, rounded estimate: 65%) in the event of a payment default.

The rating action reflects the change in our approach in assessing the credit quality of Tallgrass following its announcement to simplify the structure. When the transaction closes Tallgrass will own 75% of REX, which now leads us to consolidate its cash flows and debt proportionately. As a result, the partnership's scale notably increases, resulting in total adjusted EBITDA of roughly $1 billion. We previously only accounted for the distributions it received from REX without burdening its leverage metrics with REX's debt. In our view, REX is a strategic asset to Tallgrass and we would expect Tallgrass to support REX if it became financially distressed. In addition, the recent announcement to convert a portion of the competing White Cliffs Pipeline system to natural gas liquids (NGL) service will reduce the oversupply of crude takeaway capacity in the DJ Basin. Paired with the recent improvement in commodity prices, both factors are a credit positive for Tallgrass's PXP, and should help mitigate recontracting risk in 2020 and beyond.

The outlook on Tallgrass is positive, reflecting our expectation of increasing EBITDA and adjusted debt leverage improving to the 4.0x to 4.5x range by 2019 following the debt repayment at REX. We assume a moderate decline in EBITDA when contracts on PXP expire.

We could raise Tallgrass' rating to 'BBB-' if PXP is able to successfully recontract its capacity while Tallgrass maintains adjusted debt leverage of about 4.5x. Additionally, an improvement in scale or diversification of its asset base could also lead to an upgrade if adjusted debt to EBITDA is below 4.5x.

We could revise the outlook to stable if leverage is sustained above 4.5x or if we expected a 25% or greater decline in EBITDA from PXP when contracts expire absent any other changes to the asset base to offset those lost cash flows.


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