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 September 17, 2015 - 4:29 PM EDT
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Fitch Affirms MidContinent Express Pipeline at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the 'BBB' Long-Term Issuer Default Rating (IDR) and senior unsecured rating for MidContinent Express Pipeline, LLC (MEP). The Ratings Outlook is Stable.

The affirmation reflects the cash flow stability expected from the pipeline stemming from long-term capacity reservation contracts with a diverse set of counterparties and fairly robust credit metrics given the retirement of $350 million in notes in 2014. Fitch's ratings consider that MEP faces re-contracting risk due to depressed gas basis differentials and the dynamic nature of natural gas supply and demand in the U.S., but recognizes the majority of current capacity is contracted through 2019. The ratings also considers counterparty exposure as a growing risk for the pipeline, which recently saw one of its counterparties, Quicksilver Resources (KWK), file for bankruptcy. Fitch does not believe the KWK bankruptcy will meaningfully impact cash flow or credit metrics.

MEP is a joint venture (JV) between subsidiaries of Kinder Morgan, Inc. (KMI; 50%; Long-term IDR 'BBB-'/Stable Outlook by Fitch) and Energy Transfer Partners, L.P. (ETP; 50%; Long-term IDR'BBB-'/Stable Outlook). MEP is a 505 mile natural gas pipeline system that runs from Bennington, OK, to Transco 85 hub near Butler, AL, and provides critical takeaway capacity from multiple MidContinent and Texas production basins. MEP operates in two zones. Zone 1 runs 306 miles from the Enable Midstream pipeline system terminus near Bennington, OK to the Columbia Gulf Pipeline near Delhi, LA. Zone 2 runs approximately 200 miles from Delhi to the Transco Pipeline near Butler, AL. Zone 1 has an initial design capacity of approximately 1.5Bcf/d and Zone 2 has a design capacity of 1.2 Bcf/d. MEP started operation to Transco 85 on Aug. 1st 2009.

KEY RATING DRIVERS

Stable Revenue & Cash Flow: The pipeline benefits from stable revenue and cash flow generated by long-term capacity reservation based contracts with no commodity price volatility exposure and no volumetric exposure. Most of the pipeline's capacity is currently contracted for with the majority of volumes rolling off in 2019. Small amounts of capacity contracts have begun to roll off but with limited impact to profitability.

Low Cost; Significant Connectivity: MEP is the low cost shipping option out of several production basins moving east to Alabama with several interconnects, including the Barnett, Bossier, Woodford and Haynesville plays. MEP has six receipt points which provide a high level of supply diversity and significant delivery connectivity with 10 interconnections with large long haul interstate pipeline systems that provide access to several demand markets in the U.S.

Counter Party Exposure: The lower ratings of several key shippers, including Chesapeake Energy Corp. (CHK; Long-Term IDR 'BB'/Stable Outlook) and Newfield Exploration Company (NFX; Long-Term IDR 'BB+'/Stable Outlook), expose MEP to counterparty performance risk especially in a low gas price environment. However, in its analysis Fitch considered that MEP's largest counterparties are each significant producers in their respective connected supply basins and largely have stable credit profiles.

Re-contracting Risk: A longer-term credit concern is the re-contracting risk associated with MEP's ability to renew its expiring capacity reservation contracts at economically profitable rates as they expire. Given the changing nature of supply/demand for natural gas in the U.S., Fitch believes that it is too soon to accurately evaluate re-contracting risk for the majority of MEP's capacity but recognizes that the pipeline could face re-contracting issues as its longer term contracts roll off if basis differentials remain compressed through the 2018/2019 time period. Fitch notes that rising gas prices, LNG exports, associated gas from emerging Oklahoma oil production plays like the SCOOP, and increased demand for power generation all have the long-term potential to provide increased demand for capacity within the regions MEP serves.

Solid Metrics: Fitch estimates annualized EBITDA of approximately $185 to $195 million per year with significant free cash flow before distributions to its owners of roughly $150 million. Fitch assumes all excess cash flow will be distributed to sponsors. MEP's 2014 notes were retired at maturity funded by equity contributions from MEP's owners. As a result of this debt reduction Fitch estimates significantly improved leverage metrics of debt/EBITDA of between 2.5x to 3.0x and EBITDA interest coverage of over 6.0x for the next several years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for MEP include:

--Stable revenue and earnings from capacity reservations contracts through 2019;

--Minimal maintenance capex of roughly 1% to 3% of annual EBITDA.

--All cash available for distribution (defined as EBITDA less cash interest less cash taxes) distributed to its owners throughout forecast.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Demonstrated success in re-contracting capacity intermediate to long-term at favorable rates leading to continued deleveraging. A positive ratings action is not anticipated in the near-to-intermediate term.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Significant credit event with shipper which impairs expected cash flow at the pipeline.

--Inability to re-contract expiring capacity at or near current rates.

--Additional Leverage. Should Debt/EBITDA move above roughly 4.0x on a sustained basis Fitch would likely consider a negative rating action.

LIQUIDITY

Liquidity Adequate: MEP is a relatively new pipeline system with low sustaining capital needs. As such free cash flow (before distributions to owners) is expected to be strong through the expiry of the majority of its capacity reservation contracts in 2019. Liquidity needs are limited to and MEP is party to a loan agreement with its managing owner KMI which allows MEP to borrow at KMI's discretion up to $40 million for working capital needs or other corporate purposes. All of MEP's excess cash flow is expected to be distributed to its owners.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

MidContinent Express Pipeline, LLC

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990955

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990955

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Peter Molica, +1-212-908-0288
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kathleen Connelly, +1-212-908-0290
Director
or
Committee Chairperson
Shalini Mahajan, CFA, +1-212-908-0351
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (September 17, 2015 - 4:29 PM EDT)

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