Fitch Ratings has affirmed EQM Midstream Partners, LP's (EQM) Long-Term Issuer Default Rating (IDR) at 'BB' and the senior unsecured notes and revolver at 'BB'/'RR4'.

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 EQT Corporation (EQT; 'BBB-'/Stable), its primary customer. Although Fitch views EQT's improving credit profile as a positive for EQM, EQM's ratings remain constrained by MVP.

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 $6.6 billion from the previous estimated cost of $6.2 billion. As a result, deleveraging has been delayed and Fitch expects leverage to remain elevated at YE 2022 and through 2023 until MVP is placed in-service. With multiple setbacks, timely project completion continues to present an execution risk for EQM. Fitch views this risk to be significant, as any further delays and setbacks in completing and fully executing this project can have a negative impact since EQM's earnings growth and strengthening of its balance sheet metrics is largely driven by this project.

Counterparty Credit Risk: EQM derived roughly 60% of its 2021 revenues from EQT Corporation, its primary counterparty. Due to the combination of customer concentration and reservation-based payment, EQT's credit risk has a strong bearing on EQM. As EQT is a shipper on MVP, the completion of MVP will increase the absolute amount of EQT counterparty concentration. As a positive, the MVP shipper group also includes affiliates of three highly rated utilities. While Fitch notes that EQT has released a portion of its firm capacity on MVP, EQT would still be expected to remain EQM's largest customer over Fitch's rating horizon, as the company provides EQT with critical midstream infrastructure. EQM also has exposure to HY and unrated counterparties.

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, Pennsylvania and West Virginia acreage dedications and capex protections, subject to MVP being placed in-service. Because EQM depends on EQT for cash flows and growth, EQT's operational and financial health have a strong bearing on EQM's credit profile.

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 $235 million aggregate rate relief in exchange for a $196 million cash payment since MVP has not been placed in-service by Jan. 1, 2022. Separately, EQM has a potential Henry Hub annual upside of up to $60 million through 2024, contingent upon MVP being placed in-service. Fitch believes the contract with EQT has a marginal positive effect on EQM's credit profile, given the higher MVCs and contract extension.

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 Dec. 31, 2021, the firm gathering contracts, and firm transmission and storage contracts have weighted remaining life of approximately 14 years and 13 years, respectively. Approximately 64% of 2021 revenue was from firm reservation fees, which are expected to increase once MVP is placed in-service. This contract structure provides some stability to cash flows and protection from volumetric risk.

Derivation Summary

EQM operates in the Appalachian basin and has material, concentrated counterparty exposure to EQT. EQM has larger EBITDA than DCP Midstream, LP (BBB-/Stable) and EnLink Midstream LLC (BB+/Positive). All three generate over $1.0 billion in annual EBITDA. DCP and EnLink operate in multiple basins, and EQM has lower business risk gas-transportation assets in its portfolio. However, DCP is much more diverse than EQM and EQM is less diverse than EnLink.

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 Henry Hub prices of $4.25/mcf in 2022, $3.25/mcf in 2023, $2.75/mcf in 2024 and $2.50/mcf thereafter;

MVP is complete end 2023 and non-recourse MVP project financing occurs after Dec. 31, 2023;

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 Equitrans Midstream Corporation's (ETRN) consolidated leverage, in accordance with the consolidated credit profile treatment under Fitch's Parent-Subsidiary linkage (e.g. adding the deemed debt portion of the new ETRN preferred shares to EQM debt);

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 '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: As of March 31, 2022, EQM had approximately $1.86 billion in liquidity. Cash on balance sheet was approximately $28 million, in addition to the $1.83 billion available under the $2.25 billion revolver (the availability is after recognizing credit extensions of $235 million related to the issuance of letters of credit). As of March 31, 2022, EQM was in compliance with its covenants. Fitch notes that the definition of leverage under the bank agreement is different than its own definition of leverage. Fitch expects EQM to maintain compliance with its covenants in the near term.

On April 22, 2022, the credit facility was extended through April 2025 and amended to reduce the facility size to $2.16 billion through October 2023 and $1.55 billion from October 2023 through April 2025. Among other adjustments, the leverage covenant was updated through the extension date such that leverage cannot exceed 5.50x with a maximum leverage of 5.85x for four quarters beginning with mobilization for MVP forward construction. Fitch believes these adjustments provide EQM with headroom during high MVP related capex spending as push out of MVP in-service date delays deleveraging.

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

EQM Midstream Partners, LP has an ESG Relevance Score of '4' for Exposure to Social Impacts due to continued environmental permitting challenges for MVP, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

EQM Midstream Partners, LP's ESG Relevance Score for Group Structure has changed from a '4' to a '3'. EQT is no longer a significant related party and this change has resulted in the revision of the resulted 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'. 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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