Fitch Ratings has affirmed
Fitch has also affirmed ENLK's preferred equity rating at 'BB-'/'RR6'. The Rating Outlook for both entities is revised to Positive from Stable.
The Positive Outlook revision reflects ENLC's leverage (total debt with equity credit to operating EBITDA), which has improved faster than previously forecasted, and is expected to decline below Fitch's positive 4.5x leverage sensitivity by YE 2022. Sustained leverage below positive sensitivity threshold over a couple of quarters would be a main trigger for an upgrade.
Key Rating Drivers
Deleveraging Underpinned by Financial Policy: Fitch calculated ENLC's YE 2021 leverage to be 4.8x. During 2020 and 2021, ENLC was able to execute on credit enhancement items, such as distribution cuts, capex reduction, and cost savings, and posted strong 2021 result. ENLC raised its distributions in the 4Q21 by 20%. Given ENLC's current distribution policy and capex program, Fitch forecasts that ENLC's leverage will trend below positive sensitivity threshold of 4.5x in 2022.
ENLC's 2021 earnings were stronger than expected due to a significant improvement in the commodity environment in the second half of 2021, which accelerated growth in Permian and also helped to stabilize volumes in
Permian and Louisiana Assets Growth: The Permian and
ENLC recently completed relocation of the underutilized 80mcfpd natural gas processing plant from
Customer Exposures and Volumetric Risk: Customer risk is a general concern across most G&P operators in the midstream sector with exposure to non-IG producer customers. Fitch continues to view the counterparty risk for ENLC as limited across its three main G&P segments as the customer base is diverse and large counterparties in Permian and
Counterparty exposure in the Barnett could pose a concern given the basin economics and unclear hedging policy by its main producer customer in that region. Another key risk that ENLC faces given its contract structure is volumetric risk, as ENLC does not have any material MVCs remaining. Diverse customer base, where no customer represents more than 20% of the gross margin, offsets some of the volumetric risk.
Fee-Based Cash Flow: ENLC has exhibited a strong focus on fee-based contracts to mitigate commodity price volatility. Fitch expects ENLC will continue to generate at least 90% of its gross margin from fee-based services in 2022 and 2023. G&P operations in the Permian and
Parent Subsidiary Linkage: The credit profile of ENLC and ENLK under Fitch's Parent Subsidiary Ratings Linkage Criteria is consolidated for the ratings of these two entities. Fitch considers ENLK to have a stronger credit profile than ENLC. ENLC is the parent of ENLK and ENLK, as the operating subsidiary, is the only source of cash flow for ENLC.
The debt of ENLC is guaranteed by ENLK and is ranked pari passu to the existing debt at ENLK. The legal ring-fencing is open as there are minimal limitations between the entities. Access and control is also open, given the pooled cash between the two entities. Due to the aforementioned linkage considerations, Fitch rates both entities based on the consolidated credit profile and assigns the same IDRs.
ESG Consideration: ENLC's and ENLK's ESG Relevance Score for Group Structure and Financial Transparency has changed from a '4' to a '3'. ENLC operates under a complex group structure, with private equity levered holding company owning its general partner. Timeliness and transparency in financial and other disclosures have resulted in the revision of the relevance score. This factor no longer has an impact on ratings.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. 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.
Derivation Summary
However, WES's overall counterparty risk is greater than ENLC's, as WES is largely exposed to non-investment grade E&P producer customers. WES's largest counterparty,
Another comparable for ENLC is
This commodity price exposure has been partially mitigated in the near term through DCP's use of hedges for its NGL, natural gas and crude oil price exposure, pushing the percentage of gross margin, either fixed-fee or hedged, up to 88% as of 2Q21. This helps DCP's cash flow stability, but exposes it to longer-term hedge roll-over and commodity price risks. DCP is larger and more geographically diversified than ENLC. Fitch expects DCP YE 2021 and YE 2022 leverage to be modestly below 4.5x compared to ENLC at 4.8x in 2021 and around 4.4x in 2022 and 4.1x in 2023.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
The Fitch price deck for oil and natural gas informs the assumptions for natural gas, crude, the unhedged volumes, and NGL prices;
Flat operating results in
Moderate growth in EBITDA in 2023 and assuming flat EBITDA beyond 2023;
2022 total capex aligns with management guidance of
Distribution increase in 2022 as announced in the 4Q21 and further modest increases in forecast years.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Leverage and distribution coverage sustained below 4.5x and above 1.1x underpinned by stable segment performances.
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 that could lead to a negative rating action;
Leverage above 5.5x on a sustained basis and/or distribution coverage consistently below 1.1x.
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
Ample Liquidity: As of
ENLC was in compliance with its covenant as of
Issuer Profile
Summary of Financial Adjustments
Fitch applied 50% equity credit to ENLK's preferred equity.
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.
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