(Source: Business Wire)
Fitch Ratings has assigned a 'BBB' rating to Midcontinent Express Pipeline LLC's (MEP) proposed $800 million senior notes. The notes are expected to be issued in two tranches with $300 million due 2014 and the remaining $500 million due 2019. Proceeds from the offering will be used to repay borrowings on the company's $1.4 billion revolver, which was used to fund construction. The revolver is guaranteed by Kinder Morgan Energy Partners, L.P. (KMP, rated 'BBB' by Fitch) and by Energy Transfer Partners, L.P. (ETP, rated 'BBB-' by Fitch), each 50% owner of MEP. The senior notes do not contain such guarantees and are the unsecured obligation of MEP. The Rating Outlook is Stable.
MEP consists of a 507 mile natural gas pipeline system from Bennington, OK to Transco 85 near Butler, AL and provides critical takeaway capacity from multiple, high-growth Midcontinent and Texas shale plays. The pipeline consists of two zones: Zone 1, which stretches approximately 306 miles from the Enogex pipeline near Bennington, Oklahoma to the Columbia Gulf pipeline near Delhi, Louisiana, and Zone 2, which runs approximately 201 miles from Delhi to the Transco pipeline near Butler, Alabama.
The rating takes into account the expected stability of MEP's cash flows which are supported by long term, fixed-fee, FERC approved contracts. The pipeline is fully subscribed (including expansion projects) with an average contract life of nine years. The shortest contract term is five years with 88% of the capacity subscribed for 10 years or more. Contractual rates are 100% capacity driven with no volumetric rate component. The negotiated rates are FERC approved and fixed for the life of the contract. A fuel tracker mechanism largely mitigates commodity price exposure for MEP.
MEP has a strong economic basis despite the prospect of lower long-term natural gas prices. The pipeline has access to several high growth shale basins including Barnett, Bossier, Woodford and Haynesville. While the long term prospects for shale gas production remain strong, the current low price environment exposes pipeline operators to greater risks as producers reduce rig counts to cut supply. The risk for MEP is largely mitigated by the nature of its contractual support and also through Fitch's belief that key producers will continue drilling in shale formations for various reasons including the low cost nature of production, high production rates and/or the need to maintain drilling activities to satisfy land lease requirements.
