Fitch Ratings has affirmed
The Rating Outlook has been revised to Positive from Stable.
The Positive Outlook reflects DTM's strong performance and lower leverage in 2022 and Fitch's expectation of continued momentum in the near term. It also reflects the improving credit profile of its major counterparties.
The rating reflects long term contracts and growing scale assuring stable cash flows and low leverage, limited by exposure to non-investment grade counterparties. Fitch expects leverage to remain at approximately 4.0x in the forecast period while DTM balances its growth needs and leverage target. DTM's exposure to low rated counterparties remains a limiting factor for the rating.
Key Rating Drivers
Low Leverage: Since
Counterparty Exposure: Despite a diversified customer base of producers, utility companies, and marketers, DTM remains exposed to counterparty risk.
Fitch anticipates that the concentration in counterparties will remain, although the takeaway capacity constraint in Appalachia is driving re-contracting and addition of new customers, and the strong liquefied natural gas (LNG) demand in the
Cash Flow Assurance: DTM's revenues are predominantly fee based with a significant percentage, over 70% in 2022, coming from MVCs and demand charges, lowering volume risk. Cash flow assurance will remain high in the near term, but the payments from MVCs and demand charges will step down over time, increasing cash flow volatility. DTM's contracts have a weighted average contract life of approximately nine years. Fitch believes DTM will manage the contract maturities and pair gathering commitments with firm transportation agreements to lower the volume risk in the gathering business.
Assets Base: The company's assets are located in two highly economic natural gas basin, the Marcellus/Utica and the Haynesville, which account for approximately 50% of total US dry gas production. In 2022, approximately 65% of EBITDA was from the Marcellus/Utica, 30% from the Haynesville and 5% from other regions. DTM's focus is on dry gas and its transportation to the Northeast and
Given the difficult regulatory process facing construction of new pipelines, especially in the Appalachian basin, DTM benefits from the high demand of its pipeline assets, including notable stake in JVs. Its assets are also well positioned to serve the growing needs of LNG export facilities located in the
Scale and Scope of Operations: With an adjusted EBITDA exceeding
Given the acquisition of additional interest in Millennium Pipeline, success in signing demand-pull contracts, and an expansion of the Louisiana Energy Access Pipeline (LEAP), Fitch anticipates the pipeline segment, including the JVs, will grow faster than the gathering segment in the near term and contribute approximately 60% of adjusted EBITDA in 2023. The increasing weight of pipeline business adds additional stability to the cash flow as this segment is generally less volatile than the gathering business.
Derivation Summary
DTM is the midstream segment spun from
A comparable for DTM is
Revenues at both companies are predominantly fee-based. Compared to DTM,
Fitch calculated
The companies are rated the same as they are similar on most features.
Key Assumptions
A Fitch price deck of
Revenues have mid-single digit organic growth in the near term;
Phase 1 of LEAP expansion is online in Q4 2024;
Capital spending and dividends growth generally in line with management guidance;
The company generate positive free cash flow (which may be directed for opportunistic acquisitions, returns for shareholders, or debt reduction).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA Leverage below 4.0x, together with an expectation that the leverage can be sustained below 4.0x;
Improvement in the credit quality of the major counterparties.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage (total debt with equity credit to operating EBITDA) be at or above 5.0x on a sustained basis;
A significant decline in MVCs/demand charges beyond Fitch's forecast period may require lower leverage for ratings to remain unchanged;
Acquisitions or significant increase in capex targeted towards higher business risk projects.
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 '
Liquidity and Debt Structure
Adequate Liquidity Expected: As of
Issuer Profile
DTM has a platform of gathering assets and pipeline assets, wholly owned and through JVs, that connect dry gas to demand centers in the Midwestern
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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