Fitch Ratings has affirmed EnLink Midstream, LLC's (EnLink) and EnLink Midstream Partners, LP's (ENLK) Long-Term (LT) Issuer Default Ratings (IDRs) and senior unsecured ratings at 'BBB-'.

Fitch has also affirmed ENLK's preferred equity rating at 'BB'. ENLK guarantees the debt at EnLink. The Rating Outlook for both entities is Stable.

The ratings are based on a revenue stream that is almost entirely fee-based, as well as management's demonstrated commitment to credit quality and good record of cost control. A concern is volumetric risk. The Outlook is also based on an expectation of continued balanced financial policies.

Key Rating Drivers

Reliable Volume Growth: Forecasts for the Permian region from a variety of sources project long-term steady volume growth for the resident E&P industry. The Permian region is EnLink's largest segment, and the company has performed well there with YTD volume increases through Sept. 30, 2023.

Since midstream companies have to spend capex 10-18 months in advance of new planned wells, the previous era of aggressive growth plans featured many 'busts' that thwarted expansion efforts. Steady growth is advantageous for midstream companies, and YTD Sept. 30, 2023 volume performance in EnLink's overall field area footprint demonstrates this benefit, with rising EBITDA and moderate growth capex.

Fee-Based Cash Flow: EnLink's EBITDA mainly comes from fee-based contracts and fee-type commercial activities (purchase/re-sell). Fitch expects the company will generate approximately 90% of its gross margin from fee-based services in 2024. Gathering and processing (G&P) operations in the Permian and Oklahoma are further underpinned by long-term acreage dedication contracts. EnLink also hedges a portion of its commodity exposure (a small amount of its EBITDA) for the coming 12 months.

Solid Leverage: Fitch forecasts that EnLink's 2024 leverage will be approximately 4.0x. Based on Fitch's 4Q23 forecast, EnLink was, in Fitch's annual forecast, strongly FCF-positive in 2023. Cash generation was supplemented by the divestment of the Ohio River Valley asset. EnLink's leverage level positions it solidly in its rating category, which Fitch views as a positive given the company's exposure to volumetric risk, which could manifest in 2024, given the warm winter thus far. EnLink recently revised its long-term leverage target (Fitch and management calculate leverage differently) to 3.5x from 4.0x. The company has successfully balanced its financial goals in recent year to achieve its previous 4.0x target.

Parent Subsidiary Linkage: Fitch regards co-borrowers GIP III Stetson I, L.P. and GIP III Stetson II, L.P. (collectively, GIP Stetson; BB-/Stable) as EnLink's parent by virtue of GIP Stetson holding indirectly the general partnership stake in EnLink. There is some legal ringfencing (as defined in Fitch's Parent Subsidiary Linkage criteria) between the entities, by virtue of both the conventions and provisions of GIP Stetson's general partnership role, as well as a financial covenant contained in EnLink's revolver. The extent of legal ring-fencing porous (the designation between insulated and open). In averaging the rest of the sub-factors in PSL, Fitch also views Access/Control as porous. Fitch assesses the consolidated group profile at 'bb'. EnLink's IDR is two notches higher than this consolidated group profile.

Derivation Summary

Plains All American (BBB/Stable) is a useful comparable for EnLink given its geographical diversity and high percentage of EBITDA from a variety of fee-based activities.

Plains has some minimum volume commitments, mainly on its Texas long-haul pipelines that have been constructed in the last decade. This revenue-assurance feature drives Fitch's view that Plains All American has somewhat less business risk than EnLink.

Fitch forecasts Plains All American's leverage to be below 3.5x in 2024 vs. 4.0x for EnLink.

Plains All American has a heavy focus on crude oil, whereas EnLink has more of a presence in the natural gas infrastructure chain. Tensions in the Middle East and a warm winter in the U.S. indicate macro tailwinds for Plains All American and headwinds for EnLink. Other than the leverage forecast, Fitch makes no distinction between the companies' 'hydrocarbon focus.'

The companies have similar financial policies concerning leverage.

The difference in rating is mainly due to Fitch's assesement that Plains All American has moderately less business risk.

Key Assumptions

Fitch Oil and Gas price deck.

EBITDA profile is approximately level.

Distribution growth in the out years in-line with the Jan. 16, 2024 board declaration. Fitch assumes the unit repurchase program announced the same day is fulfilled.

Capex remains higher than in the trough period of 2020-2022 inclusive.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Leverage sustained below 3.5x underpinned by stable performance across the segments, and also in conjunction with borrower GIP III Stetson I, L.P. being upgraded (per Parent Subsidiary Linkage).

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;

Leverage expected to be above 4.5x on a sustained basis.

A sustained change in financial policies which tilts strongly to shareholder 'rewards.'

A negative rating action of the borrower GIP III Stetson I, L.P. (per Parent Subsidiary Linkage criteria).

Liquidity and Debt Structure

Ample Liquidity: EnLink had $1.2 billion in available borrowing capacity on its $1.4 billion revolver due June 2027 and $48.1 million in cash & equivalents, as of Sept. 30, 2023.

The revolving credit facility contains a financial covenant limiting leverage, defined as consolidated net indebtedness to consolidated EBITDA, to 5.0x. This maximum may temporarily increase to 5.5x following and acquisition, subject to certain conditions. EnLink was in compliance with its covenants as of Sept. 30, 2023 and is expected to remain in compliance throughout Fitch's forecast.

Near-term refinancing needs are manageable with maturities totaling $97.9 million in 2024, $714 million in 2025 and $491 million in 2026. Fitch expects EnLink will continue funding capex with internally generated cash flow in the near term.

Issuer Profile

EnLink Midstream, LLC is a gathering and processing company that operates mainly in Texas, Oklahoma and Louisiana. Its Louisiana segment also features hydrocarbon transmission and fractionation assets, among others.

Summary of Financial Adjustments

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

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.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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