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Rating Action:

Moody's downgrades Midcontinent Express Pipeline to Ba2; negative outlook

28 Mar 2016

$450 million of rated debt affected

Toronto, March 28, 2016 -- Moody's Investors Service, ("Moody's") downgraded Midcontinent Express Pipeline LLC's (MEP) Corporate Family Rating (CFR) and senior unsecured notes rating to Ba2 from Ba1. Moody's assigned a Probability of Default Rating of Ba1-PD. The rating outlook was changed to negative from stable.

"The downgrade reflects Midcontinent Express Pipeline's significant counterparty risk due to its contractual exposure to Chesapeake Energy Corporation (Caa2 negative), which may lead to lost revenue," said Terry Marshall. "In addition most of MEP's existing contracts roll off in 2019. Based on current market conditions we expect contracts to be renegotiated at substantially lower rates, which could result in higher leverage".

Downgrades:

..Issuer: Midcontinent Express Pipeline LLC

.... Corporate Family Rating, Downgraded to Ba2 from Ba1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba2(LGD4) from Ba1(LGD4)

Assignments:

..Issuer: Midcontinent Express Pipeline LLC

.... Probability of Default Rating, Assigned Ba1-PD

Outlook Actions:

..Issuer: Midcontinent Express Pipeline LLC

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

MEP's Ba2 CFR reflects significant contractual exposure to weak counterparties and re-contracting risk as most of its contracts roll off in 2019. MEP has 90% of its capacity under firm contracts, of which approximately 50% is contracted with two Caa2 rated E&P shippers (mostly Chesapeake (Caa2 negative) but also to a small extent, Sandridge (Caa2 stable)) . The 2019 contract roll off is concurrent with MEP's remaining $450 million debt maturity. The rating also considers the company's full payout of its cash flow to its owners, Kinder Morgan Inc. (KMI, Baa3 stable) and Energy Transfer Partners, L.P. (ETP, Baa3 stable), which means that MEP is not building liquidity to repay its 2019 debt maturity. KMI and ETP have in the past invested substantial equity in MEP, including in 2014 to fund MEP's $350 million debt maturity.

MEP's ratings are constrained by being a producer-push pipeline with firm contracts that may be difficult to renew on similar terms as they roll off (current contracts are approximately $0.42/Mcf from beginning of Zone 1 through Zone 2). These contracts were signed at a time when rapidly expanding natural gas production from new shale plays provided negotiating leverage to the builders of infrastructure. The build out of new pipelines from the Northeast to the Southeast has increased overall capacity out of that region and has made Marcellus natural gas more competitive in the Southeast, the primary region served by MEP. However there are additional sources of natural gas supply from the Midcontinent that could be shipped on the pipeline. The rating is supported by MEP's strong financial metrics. Absent any counterparties not fulfilling their payment obligations, the cash flow is expected to remain stable through 2018 due to the take or pay contracts. MEP ships to Transco Station 85, where gas can be sold at a premium to the Midcontinent prices, which makes the MEP pipeline attractive. Longer term, MEP could benefit from further development of the SCOOP and the STACK plays in Oklahoma due to MEP's lease capacity on one of Enable Midstream Partners' (Baa3 stable) gathering systems, which services the SCOOP and STACK plays and ties into one of MEP's receipt points. In addition power companies will have increasing demand for natural gas in areas serviced by MEP.

MEP has adequate liquidity through 2016. At December 31, 2015 MEP had negligible cash, no revolving credit facility and no financial covenants. MEP replaced its $75 million unsecured credit facility with a $40 million intercompany working capital line. We do not include the working capital line in our liquidity assessment as it matures in February 2017. We expect that all of the cash flow after maintenance capital (about $160 million in each of 2016 and 2017) will be distributed to the equity holders leaving nothing available to amortize debt maturities. MEP has no debt maturities until September 2019 when the $450 million notes are due. Secondary liquidity through asset sales is limited given the pipeline is the only asset of the company, but the sale of additional joint venture interests is possible.

The negative outlook reflects Moody's expectation MEP's weaker counterparties might not be able to fulfill their payment obligations for the duration of the contracts leading to lower cash flow and higher leverage.

The rating could be downgraded if credit quality of MEP's counterparties deteriorates or if adjusted debt to EBITDA appears likely to exceed above 5x.

The rating could be upgraded if MEP's contract counterparty risk improves while maintaining leverage below 4.0x on a sustainable basis or if excess cash flow is used to build meaningful liquidity to be able to pay off the 2019 maturity rather than paid out as distributions to the shareholders.

Midcontinent Express LLC is a 50/50 joint venture between subsidiaries of Kinder Morgan Inc. and Energy Transfer Partners, L.P.. The pipeline originates near Bennington, Oklahoma, cuts across northeast Texas, northern Louisiana, central Mississippi, and terminates at Transco Station 85 near Butler, Alabama.

The principal methodology used in these ratings was Natural Gas Pipelines published in November 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's downgrades Midcontinent Express Pipeline to Ba2; negative outlook
No Related Data.
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