S&P Affirms Ratings, Outlook on EQT Midstream Partners (EQM) Folliwng Q2 Results
S&P Global Ratings Services said today that it affirmed its 'BBB-' corporate credit rating and 'BBB-' senior unsecured debt rating on EQT Midstream Partners L.P. (NYSE: EQM). The outlook is stable.
"The rating action reflects the fact that EQT Midstream has maintained credit measures and financial ratios that are considerably stronger than our previous expectations and well below the partnership's long-term financial targets," said S&P Global Ratings credit analyst Michael Grande.
Total adjusted debt to EBITDA is about 1.2x as of June 30, 2016 and we expect leverage to be between 1.5x and 2x for 2016, which is about a full turn below our previous expectations of 2.5x to 3x and below the partnership's long-term target of 3.5x.
We are revising our financial risk profile to intermediate from significant to reflect the strong credit measures and our expectations that total debt to EBITDA will likely remain below 2.5x in 2017. We assume EBITDA for 2016 will be between $550 million and $560 million, mainly generated from the partnership's existing asset base and higher gathering volumes. We assume leverage increases because EQT Midstream expects to fund its next asset acquisition from parent EQT Corp. mostly with debt. Our 2016 forecast assumes maintenance and growth capital spending of about $750 million, which results in a free cash flow (operating cash flow minus capital spending) deficit of about $260 million and a discretionary cash flow (operating cash flow minus spending and distributions) deficit of about $600 million. We project the partnership's coverage ratios to remain strong, with EBITDA interest coverage in the 10x to 11x area and a distribution coverage ratio of about 1.4x to 1.5x in 2016.
Our ratings approach reflects EQT Midstream's close ties with EQT Corp., which through its ownership of EQT GP Holdings, LP, owns the 2% general partner and 26.6% limited partner interest in the partnership. It is also by far EQT Midstream's most significant customer, accounting for about 73% of revenue. We believe EQT Corp. will continue to use EQT Midstream as a funding source to support its drilling program in the Marcellus and Utica shales, as EQT Corp. continues to monetize the gathering assets it still owns. Although not absolute, we believe EQT Corp. would provide some support to the partnership if it were under stress or was unable to access the capital markets.
EQT Midstream's fair business risk profile assessment balances the stable cash flows coming from long-term fee-based contracts in its transportation and gathering segments with the partnership's moderate size and limited asset and geographic diversity. EQT Midstream's Equitrans transmission system, a 700-mile regional interstate pipeline in the Marcellus Shale, underpins the partnership's cash flow stability. Firm reservation charges account for most of the capacity, which is independent of throughput levels, and the weighted average contract life of about 17 years is largely with investment-grade shippers. The pipeline's anchor shipper is EQT Corp., which accounts for about 58% of revenues, with investment-grade local distribution companies making up most of the rest.
Cash generated from gathering assets account for the remaining part of the partnership's EBITDA and will be a driver of growth as additional assets are acquired from EQT Corp. The gathering systems are backed by 10-year fee-based contracts primarily with firm capacity reservation commitments, which support EQT Midstream's credit profile. EQT Corp. accounts for more than 90% of the gathering segment's total revenues.
The outlook on EQT Midstream is stable and reflects the stable outlook on parent EQT Corp. The outlook reflects our belief that EQT Corp. will maintain strong financial measures such as expected average FFO to debt of about 50% or greater. On a stand-alone basis, the stable outlook at the MLP reflects our belief that the partnership will maintain conservative financial leverage of between 2x and 2.5x during the next 12 months, and about 3.5x longer-term. The stable outlook also reflects that the partnership will have sufficient liquidity to fund its growth initiatives, including potential assets purchases from EQT Corp.