NEW YORK--(BUSINESS WIRE)--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 affirmations reflect the cash flow stability that is supported by long-term contracts with a diverse set of counterparties and fairly robust credit metrics given a recent pay down in outstanding debt. 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 United States, but recognizes the majority of current capacity is contracted through September 2019.
MEP is a joint venture (JV) between Kinder Morgan Energy Partners L.P. (KMP; 50%; IDR rated 'BBB' by Fitch; Rating Watch Negative), Regency Energy Partners L.P. (RGP; 50%; IDR rated 'BB' 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 RATINGS DRIVERS
Stable Revenue & Cash Flow: Stable revenue and cash flow generated by long-term capacity reservation based contracts with no commodity price volatility exposure and no volumetric exposure. All of the pipeline's capacity is currently contracted for with the majority of volumes rolling off in July 2019. Small amounts of capacity contracts will begin to roll off 2014 through 2019.
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 rated 'BB'; Positive Outlook) and Newfield Exploration Company (NFX; Long-Term IDR rated 'BB+'; Stable Outlook), expose MEP to counterparty performance risk especially in a low gas price environment. However, in its analysis Fitch considered that the counterparties are each significant producers in their respective connected supply basins and largely have improved credit profiles versus recent history.
Re-contracting Risk: A longer-term credit concern is centered on 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 United States, 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, and increased demand for power generation all have the long-term potential to provide significant demand for capacity within the regions MEP serves.
Solid Metrics and Liquidity: Fitch estimates annualized EBITDA of approximately $185 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 recently 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 2.5 times (x) to 3.0x over the next several years through 2018 versus prior expectations in the 3.5x - 4.0x range.
RATINGS SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Demonstrated success in recontracting 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 cash flow.
--Inability to recontract 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.
Fitch affirms the following:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Liquidity Review: Pipelines, Midstream and MLPs' (July 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - First Quarter 2014' (June 2014);
--'U.S. Midstream Dashboard' (June 2014);
--'Non-Traditional MLP Assets (Changing Mix, Changing Risk)' (May 2014);
--'MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)' (March 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).
Applicable Criteria and Related Research:
Pipelines, Midstream and MLP Stats Quarterly -- First-Quarter 2014 (First-Quarter Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750842
U.S. Midstream Dashboard
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751223
Non-Traditional MLP Assets (Changing Mix, Changing Risk)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370
MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738615
Liquidity Review: Pipelines, Midstream and MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752807
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating Pipelines, Midstream and MLPs - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=877714
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