NEW YORK--(BUSINESS WIRE)--Fitch Ratings views Consolidated Edison, Inc.'s (ED) ('BBB+' IDR; Stable Outlook) announcement to purchase a 50% ownership interest in a newly formed joint venture (JV) with Crestwood Equity Partners LP (Crestwood) as largely neutral to its credit profile. ED will make a cash contribution of $975 million for its ownership interest with an implied market value of almost $2 billion and a 13x EBITDA multiple. ED will receive 65%/65%/60% of JV cash distributions for the first three years post-closing, and 50% of distributions thereafter. The transaction is expected to be substantially completed in second quarter 2016.
The JV will own and develop Crestwood's three existing natural gas pipelines and four storage facilities located in northern Pennsylvania and southern New York. These are well situated within the core of the Northeast Pennsylvania Marcellus shale gas-rich supply area and provide a critical link between robust natural gas supply sources and Northeast U.S. demand markets, including New York City and New England. This transaction builds upon ED's acquisition of a 12.5% ownership interest in the Mountain Valley Pipeline project in early 2016, and provides opportunities for additional growth with management's expectation of several infrastructure expansion projects in the Northeast region coming online by 2022. These projects will directly benefit ED as one of the shippers on the pipelines. ED's ownership interest will be held under a subsidiary of Con Edison Transmission, Inc., which is a wholly-owned subsidiary of ED.
Given the modest scope of the initial investment, with cash distributions projected to contribute approximately 2% of ED's consolidated EBITDA on average, and JV acquisition debt representing approximately 3% of consolidated debt at year-end 2015, Fitch considers the impact of the transaction on ED's consolidated metrics to be marginal. Fitch finds some level of comfort in management's commitment to fund the transaction in a conservative manner based on the existing capital structure. Pro-forma parent-level debt is projected to remain low at approximately 10% of total consolidated debt. Fitch estimates pro-forma consolidated FFO-adjusted leverage and adjusted debt/EBITDAR credit measures to average 4.4x and 4.0x, respectively, over 2016-2019, consistent with ED's existing ratings. Importantly, Fitch expects ED's wholly-owned regulated utilities, Consolidated Edison Co. of New York (CECONY) and Orange & Rockland Utilities, Inc. (ORU), to remain the largest contributors to ED's earnings, representing more than 90% of consolidated EBITDA over 2016-2019, while JV assets are projected to contribute about 2% (after adjusting for maintenance capex) over the same time period.
Potential concerns around ED's expansion into midstream are somewhat offset by the nature of Crestwood's contracted assets with approximately 93% of revenue generated from stable, take-or-pay contracts with relatively moderate re-contracting risk and limited volume risk. The assets have a weighted tenor of three+ years. Crestwood will continue to manage the assets and a newly-formed services company will operate the assets under a shared services agreement. However, Fitch does have concerns about counterparty credit risk. Fitch estimates approximately 50%-60% of revenue is driven by E&P customers, including a mix of investment-grade and high-yield names. Two of the top three pipeline customers are rated below investment-grade by Fitch with the pipeline segment representing close to half of total JV revenue. Cash flow distributions could be lower than anticipated in the event high-yield customers experience financial distress and cannot meet their capacity commitments.
Furthermore, although not rated by Fitch, Crestwood's financial profile would suggest a below-investment-grade credit profile, carrying higher business and liquidity risk than ED. Due to persistently low commodity prices, a large number of midstream players, including Crestwood, have experienced financial distress and have had challenges, or in some cases, been unable to access capital markets over the last year, exacerbating risks around liquidity and financial viability.
Negative rating actions on ED could occur if management pursues a more aggressive management strategy towards the unregulated businesses, including investments into more volume/commodity price-sensitive midstream operations which leads to materially higher leverage.
Additional information is available on www.fitchratings.com.
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