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
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.
Fitch's key assumptions within the rating case for MEP include:
--Stable revenue and earnings from capacity reservations contracts
--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.
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
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 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.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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