Fitch Ratings has affirmed
The Rating Outlook remains Negative.
The Negative Outlook reflects Fitch's view that past and potential trends have lowered EQM's prospects for avoiding a sustained period of high leverage, and continued uncertainties around the Mountain Valley Pipeline (MVP) project timeline and execution as it continues to experience regulatory permitting challenges, which have caused repeated delays and budget escalation. Fitch believes MVP has a significant bearing on EQM's credit profile, with current deleveraging plan hinging on MVP coming into service. Fitch expects YE 2022 leverage between approximately 5.1x-5.3x, and elevated above negative sensitivity at YE 2023.
The ratings also consider EQM's counterparty concentration to
Key Rating Drivers
MVP Overhang: A large part of EQM's growth is dependent on the completion of MVP and the cash flows associated with it. The project has encountered large schedule delays and cost overruns due to permitting and environmental challenges. Fitch had previously assumed an in-service date of YE 2022. The management has now guided towards a revised in-service date in 2H23 for higher total project costs increasing to approximately
Counterparty Credit Risk: EQM derived roughly 60% of its 2021 revenues from
Gathering Contracts with EQT: Under the 2020 renegotiated EQT gathering contract, EQM benefits from a longer-term schedule of higher minimum volume commitments (MVCs), a global MVC rate,
An important positive is that the benefit of certain rate relief to EQT is held in abeyance until MVP is placed in service. Fitch, however, notes that EQT has a one-year option to forgo
Limited Geographic and Counterparty Diversification: EQM's business lines and geographic diversity are limited with strong ties and focus on EQT's production in the Appalachian region. Fitch typically views single-basin operators with large customer concentration as having exposure to outsized event risk, which could be triggered by an operating issue at EQT or any production difficulties in the Appalachian basin.
Despite EQM being in one of the country's most prolific gas basins, EQT is expected to maintain flat to moderate production growth over rating horizon as exploration and production companies overall maintain capital discipline and prioritize FCF amidst natural gas price volatility, basin takeaway constraints and macro-economic uncertainties.
Revenues from Long-Term Capacity Reservation Payments: Long-term contracts with firm reservation fees for the gathering and transmission sides of the business support EQM's operations. As of
Derivation Summary
EQM operates in the Appalachian basin and has material, concentrated counterparty exposure to EQT. EQM has larger EBITDA than
DCP has higher volume risk, with only about 70% of its gross margins generated from fee-based contracts versus 90% of EnLink's gross margins. EQM had approximately 64% of revenue from firm reservation fees in 2021.
EQM exhibits higher leverage compared with EnLink and DCP, for which Fitch expects YE 2022 leverage below 4.5x and between 3.0x-3.2x, respectively. Due to the stress of the multiyear MVP project, these peers are better positioned than EQM, where Fitch expects leverage to remain elevated until MVP is in service. Fitch expects leverage of approximately between 5.1x-5.3x for YE 2022.
Key Assumptions
Fitch price deck for
MVP is complete end 2023 and non-recourse MVP project financing occurs after
Dividends and capex for 2022 in line with management guidance. No dividend growth expected in forecast period;
No acquisitions, asset sales or equity issuance assumed.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action is not currently viewed as likely in the medium term until MVP comes into service;
Post MVP completion, positive rating action at EQT may lead to a positive rating action at EQM. The Outlook is not likely to be stabilized until MVP comes into service.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant long running problems at MVP leading to delays and/ or cost over-runs, with no foreseeable resolution;
Significant credit deterioration at EQT, including but not limited to liquidity constraints;
Leverage (total debt with equity credit/adjusted EBITDA) of over 5.5x for a sustained period; following the EQM buy-in transaction, the 5.5x leverage is calculated by reference to
Dividend coverage ratio below 1.0x on a sustained basis;
A change in operating profile such that EQM introduces a material amount of non-fee-based contracts for its gathering business;
Impairments to liquidity;
A change in the financial policies set by ETRN that is materially adverse to EQM's credit quality.
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: As of
On
Issuer Profile
EQM is a wholly owned subsidiary of ETRN. The company owns and operates gathering, transmission, and water assets in the Appalachian basin, providing services to producers, local distribution companies and marketers.
Summary of Financial Adjustments
EQM forecast metrics referred to herein are calculated by reference to ETRN financial statements, with an adjustment for the preferred shares to reflect a 50/50 debt to equity treatment. EBITDA in the forecast metrics reflects cash received from EQT that is booked to deferred revenue rather than revenue; when EQT payments transition to where the deferred revenue is being amortized into revenues, this amortization will be removed from revenues to arrive at EBITDA. Regarding unconsolidated affiliates, Fitch calculates midstream energy companies' EBITDA by use of cash distributions from those affiliates, rather than, for example, rateable EBITDA from those affiliates.
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.
Public Ratings with Credit Linkage to other ratings
EQM's default risk profile is influenced by EQT, which is its primary customer/counterparty.
ESG Considerations
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.
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