Compressed basis differentials could squeeze cash flows at Midcontinent Express Pipeline LLC (MEP), which is facing recontracting risk in 2019, according to Standard & Poor's Ratings Services (S&P), which lowered its outlook on MEP to "negative" from "stable."

S&P also affirmed its "BBB-" corporate credit rating on the company and "BBB-" issue-level rating on its senior unsecured notes. As of March 31, MEP had about $829 million of total reported debt. S&P credit analyst William Ferara said the pipeline also faces increased counterparty risk.

Ferara said the ratio of debt to earnings before interest, taxes, depreciation and amortization should remain at about 4.5-times in the near term, which is adequate for the rating. "However, recontracting risk could result in substantially lower cash flows when the vast majority of existing contracts expire in 2019. In addition, the credit quality of key counterparty Chesapeake Energy Corp. (Chesapeake, "BB-" negative outlook), which is the anchor shipper on MEP and contracts for nearly 40% of capacity, has deteriorated," Ferara said.

The ratings on MEP reflect its consolidated credit profile, which S&P characterized as having a "strong" business risk profile and a "significant" financial risk profile. MEP is a joint venture of Kinder Morgan Energy Partners LP (50%; KMP; BBB/Stable/A-2) and Regency Energy Partners LP (50%; Regency; BB/Stable/--).

MEP is a 505-mile interstate gas pipeline that runs from Bennington, OK, to the Transco Station 85 pipeline expansion near Butler, AL.

"While the remaining contract life limits the potential that we could lower ratings, we could do so if we become increasingly confident that basis spreads will remain low and cause materially lower recontracting rates in 2019 or if counterparty credit risk increases," S&P said.

Narrower basis differentials and recontracting risk also caused S&P to lower its ratings on Rockies Express Pipeline LLC early this year (see Daily GPI, Jan. 31).

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