Fitch Ratings has affirmed the 'B-' Long-Term Issuer Default Ratings (IDRs) of Rockpoint Gas Storage Partners LP (ROCGAS) and Rockpoint Gas Storage Canada Ltd. (RGSCAN).

Fitch has also affirmed RGSCAN's 2023 senior secured notes at 'B'/'RR3'. The Rating Outlook is Stable for both entities.

The ratings reflect ROCGAS's smaller relative size, with typical EBITDA of less than $300 million annually, higher relative business risk with operations in the volatile midstream subsegment of natural gas storage, and a geographic concentration in the province of Alberta. These factors are offset by leverage that is strong for the rating category and solid sponsor support. Fitch has applied 100% equity credit to subordinated indebtedness provided by ROCGAS's sponsor, Brookfield Asset Management Inc. (BAM).

The Stable Outlook is based on solid performance versus Fitch targets and expectations for a continued improvement in market fundamentals leading to more consistent and higher values ascribed to natural gas storage.

Key Rating Drivers

Reverberations from Winter Storm Uri: ROCGAS realized increased EBITDA from delivering natural gas in during Texas' winter storm Uri in February 2021. While these gains were short-term, Fitch believes a more lasting outcome from this extreme weather event may be an increase in the value ascribed to natural gas storage. This could result in higher rates for ROCGAS, higher utilization levels and/or longer duration contracts. Current time-spreads for the following three winters in the markets ROCGAS serves are indicative of higher prices, compared to recent history.

Winter vs Summer Prices: Time-spreads, the difference between natural gas prices in summer versus winter months, are one of the main drivers of the fees ROCGAS can charge for its storage services. These spreads are driven by regional market and nonmarket factors. ROCGAS operates in distinctly different regions of North America, the most important of which are the AECO Hub in Southern Alberta and PG&E Citygate in Northern California.

Spreads compressed at AECO for much of the first nine months of 2021, relative to recent years, due to strong demand for post-winter storage fill and an extreme heat event that gripped the province in June and July 2021. However, AECO time-spreads covering the following three winters strengthened noticeably through the end of 2021. At PG&E Citygate, time-spreads remained strong throughout 2021, outside of 2Q21, compared to recent years, and, similar to AECO, time-spreads for the next three winters have improved considerably over the past 4-5 months.

Contracting Targets: ROCGAS has set targets for the allocation of capacity to longer-term firm storage service (FSS) contracts, short-term storage service (STS) contracts and matched-booked proprietary storage positions (Optimization). The targeted allocation includes a higher percentage of FSS and STS contracts than currently exists. The trend of lower natural gas storage values across North America witnessed over the past number of years, versus longer dated history, has incited ROCGAS to sign shorter contract tenures and increase capacity used for optimization, as well as reduce overall utilization.

Fitch views management's ability to both successfully re-contract where appropriate and replace lost contracted dollars with optimization revenue as central to the internally-driven aspect of the ROCGAS story. Fitch would view contract lengths at or beyond three years in Alberta and/or California, along with high overall utilization rates, as supportive of credit quality.

Credit Metrics: Fitch expects leverage, as measured by total debt with equity credit to operating EBITDA, to be around 5.0x for the fiscal year ending March 31, 2022. This is strong for the current rating category. Fitch also expects to further decrease below 5.0x over the forecast period with steadily increasing EBITDA and a flat debt balance. The extent to which ROCGAS can continue to deliver stable annual results would be indicative of a stronger credit profile.

LNG Read-Throughs: The expansion of LNG facilities in North America and the ultimate end use of the exported LNG are important factors to ROCGAS. The company has facilities in proximity to LNG production and/or operates within a market which benefits from having an LNG facility as an added outlet for natural gas production. U.S. LNG plants are showing baseload operations, not exerting negative pressure on time-spreads and are supportive of the storage sector. ROCGAS, however, competes against more diversified and larger companies that operate storage businesses and is more leveraged than most of these peers. ROCGAS is more exposed than the average storage operator with respect to an evolution of LNG exports that is adverse to the storage sector.

Rating Linkages A parent-subsidiary relationship exists between ROCGAS (parent) and RGSCAN (subsidiary). Fitch determines ROCGAS' standalone credit profile (SCP) based upon consolidated credit metrics. Fitch considers RGSCAN to have a stronger SCP than ROCGAS. As such, Fitch has followed the stronger subsidiary path. Fitch views legal ringfencing as open as there are guarantees that flow between the parent and the subsidiary.

Fitch evaluates Access & Control as open as well given ROCGAS' 100% ownership and control of RGSCAN, as evidenced by the subsidiary's financial statements being consolidated in the parent's group financial statements. This more than offsets the mix of external and internal funding sources at RGSCAN. Due to the aforementioned linkage considerations, Fitch will rate both entities based on the consolidated credit profile and assign the same IDRs.

Derivation Summary

ROCGAS is somewhat unique in Fitch's rated midstream universe in that it is the only pure play natural gas storage business. The most direct peer comparison available is TransMontaigne Partners LLC. (B+/Stable). Both companies derive a high percentage of revenue and EBITDA from storing a commodity or commodities for a negotiated fixed fee over a period of time. ROCGAS focuses on natural gas whereas TransMontaigne is a terminaling company focusing on crude oil. ROCGAS operates in the Canadian province of Alberta as well as a few U.S. states, most notably California and Texas, while TransMontaigne operates in 20 U.S. states.

Fitch views the business risk as lower at TransMontaigne, compared to ROCGAS, due to a combination of longer relative contract duration and TransMontaigne's essentially 100% fixed-fee business mix, both of which provide better relative revenue assurance. ROCGAS utilizes matched-booked proprietary storage positions to increase returns/utilize unused storage capacity. TransMontaigne also benefits from greater geographic diversification and larger scale. ROCGAS generates roughly half the annual EBITDA compared to TransMontaigne, in most years.

Somewhat offsetting the perceived higher relative business risk, Fitch has forecasted leverage at ROCGAS to be 1.0x-1.5x lower than TransMontaigne. Fitch expects ROCGAS' FY23 total debt with equity credit to operating EBITDA to be roughly 5.0x, with leverage moving below 5.0x over the forecast period. Following a leveraging transaction completed in 4Q21, TransMontaigne has leverage that is projected to move from around 6.5x at YE2022 to closer to 6.2x over the forecast period. Fitch views the higher business risk, lower revenue assurance and smaller relative size (as measured by annual EBITDA), partially offset by lower leverage, as the main factors driving the two-notch difference between the IDRs of TransMontaigne and ROCGAS.

Key Assumptions

A historically typical summer injection season along with more normalized time-spreads, allowing natural gas storage levels at the AECO HUB to enter winter 2022/2023 at sufficient levels;

New contract and Optimization revenue both reflect on a near-term basis time-spreads near current levels, supported by natural gas storage inventories in Alberta at historically low levels and at or near five-year average levels for the lower 48 states, following the conclusion of winter 2021/2022;

The absolute level of Alberta prices, which is a driver of asset-based credit facility usage, reflects a continued large discount to NYMEX Henry Hub prices in the medium-term. In turn, the Henry Hub prices reflect the Fitch price deck e.g., $3.25/mcf for 2022, $2.75/mcf for 2023 and $2.50/mcf for 2024 and beyond;

Performance under existing contracts with third-parties produces the cash flows management forecasts;

Capex of approximately $15 million to $20 million per year (minimal growth spending);

The senior secured notes due in March 2023 are refinanced prior to maturity on materially similar terms;

Brookfield Asset Management Inc. continues to cause its subsidiary to provide a $100 million unsecured revolving credit facility for ROCGAS's liquidity;

All BAM-held (or BAM-affiliate-held) debt at ROCGAS or RGSCAN remains subordinated;

Return of capital to sponsor, including repayment of sponsor-provided subordinated debt, consistent with excess cash flow assumptions;

For the Recovery Rating, Fitch utilized a going-concern (GC) approach with a 6x EBITDA multiple, which is an approximation of the multiple seen in recent reorganizations in the energy sector. There have been a limited number of bankruptcies and reorganizations within the midstream space, but bankruptcies at Azure Midstream and Southcross Holdco had multiples between 5x and 7x by Fitch's estimate. In its recent Bankruptcy Case Study Report, 'Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries,' published in September 2021, the median enterprise valuation exit multiple for the 51 energy cases with sufficient data to estimate was 5.3x, with a wide range of multiples observed

Fitch's corporate recovery analysis uses $66 million sustainable, post-default EBITDA mainly reflecting the loss of customer contracts as they come up for renewal. Fitch calculated administrative claims to be 10%, which is a standard assumption.

RATING SENSITIVITIES

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

An increase in the percentage of working gas capacity tied to contracts with three years or more left and total debt with equity credit to operating EBITDA is expected to be 5.5x or less on a sustained basis;

Total debt with equity credit to operating EBITDA sustained below 4.0x without an increase in the percentage of working gas capacity tied to contracts with three years or more left.

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

Leverage, defined previously, sustained above 7.5x and/or adjusted EBITDA interest coverage below 1.5x;

A future decrease in the percentage of working gas capacity tied to multi-year contracts;

The existence of liquidity pressures including, but not limited to, debt maturities;

Change in the way the company structures new debt issuances (such as without full guarantees, or debt at affiliates);

Change in terms regarding Brookfield debt instruments that are adverse to third-party senior creditors.

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

Adequate Liquidity: ROCGAS has adequate liquidity stemming from a Sept. 30, 2021 cash balance of just over $21 million. The company has availability under its secured asset-based revolving credit facilities of $35 million and an unutilized $100 million unsecured revolver with Brookfield (Brookfield Revolver). Collectively, the company has $172 million of available liquidity as of Nov. 5, 2021.

ROCGAS' secured asset-based revolving credit facilities mature in Dec. 2024. The total commitment under the facilities is $200 million however in October 2021 the maximum borrowing capacity was increased to $250 million on a temporary basis until March 31, 2022. ROCGAS can only draw on these facilities to the extent allowed under the current borrowing base (which is in turn largely based on the value of natural gas inventory held). As of Sept. 30, 2021, the borrowing base collateral totaled $226.3 million.

The company has the option to defer or pay interest in kind on its $100 million unsecured revolving credit facility (as well as certain promissory notes held by BAM). With the maturity extension of the secured asset-based revolving credit facilities completed in 2021 (mentioned previously), the maturity date on the Brookfield Revolver was extended to 2025. The company's earliest debt maturity is the outstanding $397 million in senior secured notes due March 2023. The company has $400 million in outstanding subordinated unsecured promissory notes, called the Swan Notes, which were accounted for at Brookfield's transacted cost of $0 and bear no interest.

The company utilizes its credit facilities largely to purchase natural gas inventory in the summer months to be sold at higher prices in the winter months. Given that ROCGAS hedges those open positions immediately with future/forward contracts this strategy of using short-term debt instruments appears appropriate.

Issuer Profile

ROCGAS is the largest independent (i.e., not affiliated with a natural gas pipeline) owner of natural gas storage facilities in North America. ROCGAS owns or contracts for approximately 307 billion cubic feet (Bcf) of working gas storage capacity in Alberta, California, Texas and Oklahoma.

Summary of Financial Adjustments

Fitch's leverage metrics are based on financial data contained in Rockpoint Gas Storage Partners LP's audited combined consolidated financial statements. These statements perform a combination of (a) the consolidated results of Rockpoint Gas Storage Partners LP with (b) affiliate entities that are not Rockpoint subsidiaries nor Rockpoint investees. The key affiliate entities so combined are Lodi Gas Storage, LLC and BIF II Tres Palacios Aggregator (Delaware) LLC.

Fitch has applied 100% equity credit to subordinated indebtedness provided by ROCGAS's sponsor, BAM.

ESG CONSIDERATIONS

Rockpoint Gas Storage Partners, L.P. has an ESG Relevance Score of '4' for Group Structure as private-equity backed midstream entities typically have less structural and financial disclosure transparency than publicly traded issuers. The score of '4' for Group Structure reflects the complex group structure amongst ROCGAS, RGSCAN and the ultimate Sponsor, Brookfield Asset Management, including material inter-family/related party transactions with affiliate companies. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

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