NEW YORK--(BUSINESS WIRE)--Fitch Ratings does not expect to change EQT Midstream Partners, LP (EQM)'s 'BBB-' Issuer Default Rating (IDR) or 'BBB-' senior unsecured rating following the partnership's announcement that it has offered to acquire the Northern West Virginia Marcellus Gathering System from EQT Corporation (EQT; IDR 'BBB-'/Outlook Stable). EQM's Stable Outlook is not expected to be revised.
EQM has agreed to pay EQT $1.05 billion for the gathering assets. EQT will receive $997.5 million in cash and $52.5 million in common and general partner units. To fund the cash component, the partnership issued $640 million of common units and underwriters have the option to issue an additional $95 million of units. Assuming the additional common units are offered, Fitch estimates that 70% of the total acquisition funding will be done with equity.
Fitch views EQM's increase in size and scale as favorable from a credit perspective. Furthermore, the significant use of equity for funding benefits the balance sheet. Offsetting this are expectations for significant increases in spending including $370 million of growth capex on the gathering system over the next several years. Maintenance capex on the system is low and estimated to be less than $5 million a year.
KEY RATINGS DRIVERS
The 'BBB-' rating is supported by EQM's fixed fee contracts which accounted for 61% of 2014 revenues and contracts with a weighted average contract life of approximately 17 years on transmission and storage (63% of revenues) and approximately 10 years for its firm gathering contracts (37%). Other supporting factors include low leverage, plans to operate with strong distribution coverage, and a strategy to grow via dropdowns from its sponsor, EQT and to capitalize on its own organic growth opportunities.
Concerns include EQM's significant customer concentration with EQT. During 2014, EQT accounted for 62% of revenues. While this is well below customer concentration in 2013 when EQT accounted for 77% of revenues (prior to the sale of Equitable Gas Distribution), it remains relatively high. Other concerns include EQM's concentration in the Marcellus; however, that producing region remains economical even when natural gas prices are weak.
To grow EBITDA and distributable cash flows (DCF) particularly for a public MLP, Fitch expects to see significant spending for growth via dropdowns and organic growth at EQM. The manner in which the partnership funds growth going forward will be a significant driver of future credit quality. EQM's current adjusted leverage is 1.9x since it has largely financed growth with equity issuance, therefore, Fitch views the partnership as having the ability to fund growth with additional debt. Since the IPO in June 2012, management has grown EQM at a measured pace and conservatively. With EQM's plans for growth in 2015 and 2016, Fitch forecasts year-end adjusted leverage to be in the range of 3.0x-3.5x over the next couple of years.
EQM's sponsor, EQT has an inventory of midstream assets available for future dropdowns to the partnership. EQT's midstream assets are strategically located near its own production. Consequently, once assets are moved from EQT to EQM, EQT's natural gas production fills the majority of midstream assets whether it is transmission, storage or gathering.
Fitch views EQT as a large driver of EQM's future growth. Between the start of 2010 and the end of 2014, EQT Corp. invested $1.6 billion in midstream assets. In 2015, EQT Corp. intends to spend $200 million to $225 million on its midstream assets (excluding money spent at EQT Midstream).
EQT's own production growth should also drive volumes for EQM. In 2014, EQT's sales volumes increased 26% over the prior year. This is substantially above many of its peers and the growth rate is attributed to EQT's position in the Marcellus. The Marcellus attributed 79% of sales volumes during 2014.
Prior to the Northern West Virginia Marcellus Gathering System acquisition announcement, the most recent dropdown of midstream assets from EQT was the May 2014 acquisition of the Jupiter. EQM paid $1.12 billion in cash and $59 million of common and general partnership units for the transaction. That transaction was approximately twice as large as the prior dropdown, which was for Sunrise Pipeline, LLC. That transaction occurred in July 2013 for $540 million including $507.5 million in cash, $32.5 million in common and general partnership units. An additional consideration of $110 million was paid to EQT in the first quarter of 2014 following EQT's sale of Equitable Gas Company.
In addition to dropdowns, EQM has its own growth. Before the end of the first quarter of 2015, EQM expects to assume EQT's 55% interest in the Mountain Valley Pipeline, LLC. This is a joint venture for a 2 bcf per day pipeline with binding 20 year commitments for capacity. The project is estimated to cost $3 billion-$3.5 billion in total and is expected to be in service by the end of 2018. The pipeline remains subjects to regulatory approval from the FERC.
In 2015, the partnership forecasts expansion capex in the range of $435 million to $465 million. Maintenance capex is expected to be $30 million. Spending in the current year is projected to be well above the $222 million of growth capex and $15 million of maintenance capex in 2014.
Liquidity at EQM appears sufficient. As of year-end 2014, EQM had $126 million of cash on the balance sheet. In addition, it had fully availability on its $750 million senior unsecured revolver which extends until 2019.
EQM's bank agreement restricts leverage (as defined by the bank agreement) from exceeding 5.0x at the end of any quarter. With permitted acquisitions which are defined as $25 million or greater in any 12 month period, leverage cannot exceed 5.5x for the next three consecutive quarters. Other covenants include restrictions on liens, transactions with affiliates, restricted payments, restrictions on mergers and fundamental changes, restrictions on asset sales, debt and investments. Like other MLP bank agreements, EQM receives pro forma EBITDA adjustments for material projects for its leverage calculation.
The distribution coverage remains strong and was 1.9x at the end of 2014. The partnership's long-term target for the distribution coverage ratio is 1.1x.
Prior to the March equity offering, EQT owned the 2% general partnership (GP) interest and a 34.4% the limited partnership (LP) interest in EQM.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action is not viewed as likely in the near term given EQM's significant ties to EQT which is rated 'BBB-'; however, a significant increase in third party volumes for a sustained period of time and an increase in size and scale could prompt positive rating action if coupled with low leverage.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Material changes in EQM's strategy to manage the balance sheet conservatively;
--Leverage (defined as debt to adjusted EBITDA) in excess of 4.5x on a sustained basis if its size and scope are not materially larger;
--Inability to grow EBITDA as expected given significant spending (via acquisitions and strategic capex) for growth;
--Significant increases in arrangements which are not fee based which could result in more volatile cash flows.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'2015 Outlook: Natural Gas Pipelines (Stability Despite Price Uncertainty)' (December 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);
--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);
--'Bakken Shale Report (Prolific Production Prompts New Pipelines) (October 2014);
--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);
--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)';
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).