Fitch Affirms EQT Midstream L.P.'s Ratings at 'BBB-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms EQT Midstream Partners, L.P,'s (EQM) Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-.'

The Rating Outlook is Stable.

KEY RATINGS DRIVERS

The 'BBB-' rating is supported by EQM's low leverage of 2.4x for the LTM ending March 31, 2015, management's strategy of maintaining low leverage metrics over time, and its practice of using fee-based long-term contracts (weighted average contract life of 17 years in Transmission segment; 10 years in Gathering segment). EQM's growth strategy has evolved from being primarily driven by dropdowns from its sponsor, EQT Corporation (EQT; 'BBB-'/Outlook Stable), to organic growth opportunities and capital expenditures associated with dropdowns. Fitch notes there are still available dropdowns from EQT.

Concerns include EQM's significant customer concentration with EQT. In 2014, EQT accounted for 69% of revenues. While this is well below customer concentration in 2013, when EQT accounted for 77% of revenues prior to the sale of Equitable Gas Distribution, it remains relatively high. EQT's assets which have been or which will be dropped down are located near its own production, thus insuring that it is the anchor customer for the majority of midstream assets whether transmission, storage or gathering.

CAPITAL PROJECTS

EQM is currently developing several significant capital projects. In March 2015, EQM purchased EQT's interest in the Mountain Valley Pipeline LLC (55% interest) for $54 million, a joint venture that is constructing a 300-mile FERC-regulated pipeline. The estimated project cost is in the $3 billion-$3.5 billion area with an expected in-service date of fourth quarter 2018 (4Q18); EQM will fund 55% of the total project. Also in March 2015, EQM purchased the Northern West Virginia (NWV) Gathering system from EQT for $1.05 billion, including preferred interest. In December 2014, EQM submitted an application for a FERC certificate to construct a 36-mile Ohio Valley Connector pipeline which will interconnect with both the Rockies Express and Texas Eastern pipelines. Construction is expected to begin mid-2015 with a mid-2016 in-service date and a total project cost of $300 million. EQM is also undertaking various capacity enhancing projects through 2017 to create an additional 1 Bcf/day capacity at an aggregate cost of $400 million.

These projects are expected to result in 2015 growth capex in a range of $475 million and $505 million with maintenance capex of about $30 million. For 2014, growth capex was $222 million with maintenance capex of $23 million.

EQUITY FINANCING

EQM has demonstrated its willingness to fund spending with equity issuances. In 2014, EQM issued 12.4 million units for $902 million to help finance dropdowns and capital expenditures, and in March 2015, it issued 9.5 million units for $696 million to help fund the NWV dropdown. Fitch believes management will fund its growth capital with more equity than debt to preserve its credit profile.

EQT SPONSORSHIP

In 2014, EQT accounted for 69% of EQM's revenue, and owned a 2% general partner interest and a 34% limited partnership interest in EQM. Fitch views EQT as a driver of EQM's future growth, as in addition to its inventory of midstream assets for potential dropdowns, Fitch also believes that EQT's own production growth will provide opportunities for EQM. Between 2009 and 2014, EQT's sales volumes have increased 35% on a compound annual growth rate. This is substantially above many of its peers and is attributed to EQT's position in the Marcellus/Upper Devonian.

STRONG METRICS

For the LTM ending March 31, 2015, EQM's leverage as defined by Debt/EBITDA was 2.4x, above leverage of 2.1x at year-end 2014 and 1.0x at year-end 2013, as based on Fitch calculations. With EQM's plans for growth in 2015 and 2016, Fitch expects year-end adjusted leverage to be in the range of 3.0x over the next couple of years. Distribution coverage is strong, ending 2014 at 1.9x, and is expected by Fitch to remain above 1.3x for the next couple years.

LIQUIDITY

Liquidity at EQM is adequate. As of March 31, 2015, EQM had $150 million of cash on the balance sheet. In addition, it had $451 million available on its $750 million senior unsecured revolver which extends until 2019.

EQM's bank agreement restricts leverage (as defined by the bank agreement) from exceeding 5.0x at the end of any quarter. With permitted acquisitions, which are defined as $25 million or greater in any 12-month period, leverage cannot exceed 5.5x for the next three consecutive quarters. Other covenants include restrictions on liens, transactions with affiliates, restricted payments, restrictions on mergers and fundamental changes, and restrictions on asset sales, debt and investments. Like other MLP bank agreements, EQM receives pro forma EBITDA adjustments for material projects for its leverage calculation. EQM remains in compliance with its leverage covenants and is expected to remain so over the next several years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Growth capital spending of about $500 million in 2015, and marginally higher annual levels through 2018;

--Transmission and gathering contracts generating cash flow growth in excess of 20% per year;

--An emphasis on equity financing over the near term.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Positive rating action is not viewed as likely in the near term given EQM's significant ties to EQT, which is rated 'BBB-'; however, a significant increase in third party volumes for a sustained period of time and an increase in size and scale could prompt positive rating action if coupled with low leverage.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Material changes in EQM's strategy to manage the balance sheet conservatively;

--Leverage (defined as debt-to-adjusted EBITDA) of 4.5x on a sustained basis in the absence of greater size, and greater basin and customer diversity;

--Inability to grow EBITDA as expected given significant spending (via acquisitions and strategic capex) for growth;

--Significant increases in arrangements which are not fee-based which could result in more volatile cash flows.

Fitch affirms the following ratings:

EQT Midstream Partners, L.P.

--Long-term IDR at 'BBB-';

--Sr. Unsecured debt at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2015 Outlook: Midstream Services (Midstream Insulated from Falling Prices) ' (December 2014);

--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);

--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);

--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);

--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)';

--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).

Applicable Criteria and Related Research:

Rating Pipelines, Midstream and MLPs ￢ﾀﾔ Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Midstream Spending Significantly Rising for MLPs and C-Corps

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759467

What Investors Want to Know: Pipelines, Midstream and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=785149

MLP End Game (Common Goals ￢ Divergent Strategies)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=802308

Pipelines, Midstream and MLP Stats Quarterly -- Third-Quarter 2014 (Third-Quarter Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834968

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984538

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Fitch Ratings
Primary Analyst
Charles J. LaPorta, CFA
Director
+212-612-7856
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kathleen Connelly
Director
+1-212-908-0290
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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