Fitch Ratings has affirmed EnLink Midstream, LLC's (ENLC) and EnLink Midstream Partners, LP's (ENLK) Long-Term (LT) Issuer Default Rating (IDR) at 'BB+' and senior unsecured rating at 'BB+'/'RR4'.

Fitch has also affirmed ENLK's preferred equity rating at 'BB-'/'RR6'. The Rating Outlook for both entities is revised to Positive from Stable.

The Positive Outlook revision reflects ENLC's leverage (total debt with equity credit to operating EBITDA), which has improved faster than previously forecasted, and is expected to decline below Fitch's positive 4.5x leverage sensitivity by YE 2022. Sustained leverage below positive sensitivity threshold over a couple of quarters would be a main trigger for an upgrade.

Key Rating Drivers

Deleveraging Underpinned by Financial Policy: Fitch calculated ENLC's YE 2021 leverage to be 4.8x. During 2020 and 2021, ENLC was able to execute on credit enhancement items, such as distribution cuts, capex reduction, and cost savings, and posted strong 2021 result. ENLC raised its distributions in the 4Q21 by 20%. Given ENLC's current distribution policy and capex program, Fitch forecasts that ENLC's leverage will trend below positive sensitivity threshold of 4.5x in 2022.

ENLC's 2021 earnings were stronger than expected due to a significant improvement in the commodity environment in the second half of 2021, which accelerated growth in Permian and also helped to stabilize volumes in Oklahoma and North Texas. Fitch expects ENLC's growth in Permian and Louisiana should keep leverage below positive sensitivity threshold beyond 2022 under the current Fitch's price deck. Fitch believes, following the successful deleveraging in the past two years, ENLC is well positioned to manage its leverage below 4.5x, while at the same time support moderate dividend growth, a modest share buyback program and current capital expenditure levels.

Permian and Louisiana Assets Growth: The Permian and Louisiana segments remain the two growing segments for ENLC, in Fitch's forecast, as ENLC's diversification in these regions allows the company to offset flat operating results in Oklahoma and Barnett and drive EBITDA growth in 2022. Fitch projects ENLC's Permian segment to continue its recent steep growth in 2022, underpinned by strong natural gas volume production.

ENLC recently completed relocation of the underutilized 80mcfpd natural gas processing plant from Oklahoma to the Permian under project Warhorse. New plan relocation-project Phantom, which will add 200MMcf/d of processing capacity in the Midland Basin is currently under way and is expected to be completed during the 4Q22. Additionally, ENLC also has long-term contracts with high quality producer customers that have a focus in allocating capital in the Permian in the near term. Within Louisiana, ENLC has built an integrated gas and natural gas liquid (NGL) pipeline network that has interconnectivity to key export markets near the Gulf Coast.

Oklahoma and North Texas Stabilizing: The Oklahoma segment decline stabilized in 2021 and is expected to modestly grow in 2022 driven by the strong commodity back drop. Growth in Oklahoma production is driven by rig activity from several producers including the DVN/Dow Chemicals (BBB+/Stable) JV drilling program. ENLC also has exposure in the Barnett, where production volume and segment profit have been in a decline in the past years, but the decline has moderated in 2021. Fitch expects cashflow and volume to stabilize in the near term, driven by expected rig activity by BKV Barnett, the main counterparty in the region.

Customer Exposures and Volumetric Risk: Customer risk is a general concern across most G&P operators in the midstream sector with exposure to non-IG producer customers. Fitch continues to view the counterparty risk for ENLC as limited across its three main G&P segments as the customer base is diverse and large counterparties in Permian and Oklahoma are predominately investment grade rated.

Counterparty exposure in the Barnett could pose a concern given the basin economics and unclear hedging policy by its main producer customer in that region. Another key risk that ENLC faces given its contract structure is volumetric risk, as ENLC does not have any material MVCs remaining. Diverse customer base, where no customer represents more than 20% of the gross margin, offsets some of the volumetric risk.

Fee-Based Cash Flow: ENLC has exhibited a strong focus on fee-based contracts to mitigate commodity price volatility. Fitch expects ENLC will continue to generate at least 90% of its gross margin from fee-based services in 2022 and 2023. G&P operations in the Permian and Oklahoma are further underpinned by long-term, fee-based contracts. In addition, ENLC hedges its commodity exposure for the current year, further limiting any commodity price volatility impact on earnings.

Parent Subsidiary Linkage: The credit profile of ENLC and ENLK under Fitch's Parent Subsidiary Ratings Linkage Criteria is consolidated for the ratings of these two entities. Fitch considers ENLK to have a stronger credit profile than ENLC. ENLC is the parent of ENLK and ENLK, as the operating subsidiary, is the only source of cash flow for ENLC.

The debt of ENLC is guaranteed by ENLK and is ranked pari passu to the existing debt at ENLK. The legal ring-fencing is open as there are minimal limitations between the entities. Access and control is also open, given the pooled cash between the two entities. Due to the aforementioned linkage considerations, Fitch rates both entities based on the consolidated credit profile and assigns the same IDRs.

ESG Consideration: ENLC's and ENLK's ESG Relevance Score for Group Structure and Financial Transparency has changed from a '4' to a '3'. ENLC operates under a complex group structure, with private equity levered holding company owning its general partner. Timeliness and transparency in financial and other disclosures have resulted in the revision of the relevance score. This factor no longer has an impact on ratings.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Derivation Summary

Western Midstream Partners, LP (WES; BB+/Stable) is a G&P comparable for ENLC. Both companies have similar degree of geographic diversification (moderate diversification), but WES has much higher customer concentration. Fitch views that WES is better positioned financially relative to ENLC given WES's larger size (by EBITDA size) and lower leverage of 3.8x at YE 2021 (versus ENLC's at 4.8x).

However, WES's overall counterparty risk is greater than ENLC's, as WES is largely exposed to non-investment grade E&P producer customers. WES's largest counterparty, Occidental Petroleum Corp. (OXY; BB+/Stable), contributed approximately 60% of WES's revenue in 2021. ENLC has a customer concentration (greater than 10% of revenue) from higher quality customers, including Devon Energy (BBB+/Stable) and about 80% of its customers are investment grade rated.

Another comparable for ENLC is DCP Midstream Operating, LP (DCP; BB+/Positive). DCP's ratings are reflective of its favorable size, scale, geographic and business line diversity within the natural gas gathering and processing space. Relative to ENLC, DCP has greater exposure to commodity prices than many of its midstream peers, with approximately 70% of gross margin supported by fixed-fee contracts.

This commodity price exposure has been partially mitigated in the near term through DCP's use of hedges for its NGL, natural gas and crude oil price exposure, pushing the percentage of gross margin, either fixed-fee or hedged, up to 88% as of 2Q21. This helps DCP's cash flow stability, but exposes it to longer-term hedge roll-over and commodity price risks. DCP is larger and more geographically diversified than ENLC. Fitch expects DCP YE 2021 and YE 2022 leverage to be modestly below 4.5x compared to ENLC at 4.8x in 2021 and around 4.4x in 2022 and 4.1x in 2023.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

The Fitch price deck for oil and natural gas informs the assumptions for natural gas, crude, the unhedged volumes, and NGL prices;

Flat operating results in Oklahoma and Barnett with growth in the Permian and Louisiana in 2022 and beyond; 3% annual growth in the Louisiana segment profit beyond 2022; Moderation of growth in Permian over the forecast period;

Moderate growth in EBITDA in 2023 and assuming flat EBITDA beyond 2023;

2022 total capex aligns with management guidance of $285 million-$325 million; Project Phantom to be completed on time and on budget; flat capex beyond 2022;

$100 million common unit repurchase annually over the forecast period;

Distribution increase in 2022 as announced in the 4Q21 and further modest increases in forecast years.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Leverage and distribution coverage sustained below 4.5x and above 1.1x underpinned by stable segment performances.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A significant change in cash flow stability, including a move away from the current profile of fee-based profits that could lead to a negative rating action;

Leverage above 5.5x on a sustained basis and/or distribution coverage consistently below 1.1x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Ample Liquidity: As of Dec 31, 2021, there was $15.0 million in outstanding borrowings under the revolving credit facility and $41.3 million outstanding letters of credit. Its $1.75 billion revolving credit facility matures in January 2024. This facility contains a leverage covenant maximum of 5.0x for consolidated indebtedness to consolidated EBITDA (each term as defined, and where EBITDA includes EBITDA from certain capital expansion projects) and consolidated indebtedness excludes the existing preferred securities. The maximum leverage level may rise from 5.0x to 5.5x for four quarters following an acquisition (with the rise subject to limitations). Following the term loan repayment in December 2021, ENLC has no debt maturities until 2024.

ENLC was in compliance with its covenant as of Dec. 31, 2021 and is expected to remain in compliance under Fitch's forecast period. Fitch expects ENLC will continue to fund its capex program with its internally generated cash flow in the near term.

Issuer Profile

EnLink Midstream, LLC is predominately a midstream gathering and processing (G&P) company that operates in three G&P regions: Oklahoma (STACK play), Permian, and the Barnett. ENLC also operates gas and NGL gathering and transmission pipelines, gas processing facilities, gas and NGL storage, and NGL fractionation business in Louisiana.

Summary of Financial Adjustments

Fitch applied 50% equity credit to ENLK's preferred equity.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

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