Fitch Assigns Antero Midstream Partners, LP First-Time 'BBB-' Rating Outlook Stable.
AM's ratings reflect AM's strong credit linkage with Antero Resources, Inc. (AR; BBB-/Stable), a 53% owner and AM's primary counterparty. The ratings also reflect the low leverage and conservative financial profile of the partnership supported by fee-based and fixed-priced contracts that limit commodity price exposure and provide some volume protection in the form of minimum volume commitments. Fitch believes the equalization of AM's IDR to its owner and largest counterparty's IDR is appropriate because of the strong strategic and operational ties between the entities coupled with AM's low leverage profile.
On a standalone basis, AM's financial profile would meet minimum size and scale thresholds that Fitch believes are important for an investment-grade rating within the midstream space, but counterparty concentration and its single-basin gathering and processing focus would be of greater concern. AM is publicly guiding 2017 EBITDA to the $520 million-$560 million range, with Fitch expecting 2018 EBITDA above those levels. Generally, Fitch has a $500 million EBITDA threshold for investment-grade midstream energy names that the agency typically targets in terms of size and scale. However, AM's single-basin/single-customer focus provides some concern that AM is subject to outsized event risk should there be an operating or financial issue at AR or a production disruption in the Marcellus/Utica regions. This concern is somewhat mitigated by AM's plans to manage its balance sheet conservatively with lower leverage (in the 2.0x-3.0x range) than most 'BBB-' rated master limited partnership (MLP) peers with a gathering and processing focus.
AM's secured revolver has covenant and security fall-away provisions should AM be upgraded by other rating agencies to investment grade under certain conditions. As such, Fitch has equalized the secured and unsecured ratings, though would expect the secured revolver to have better recovery in a default scenario.
KEY RATING DRIVERS
Long-term Contracts; Consistent Cash flow: AM's operations are supported by long-term contracts with AR. AR has committed to long-term fixed fee agreements to provide gathering and compression services and water services to AR through 2034 and 2035, respectively. AM will provide AR these services at fixed fees, limiting AM's commodity price sensitivity., AR has provided AM with minimum volume commitments for some of these services, which provides AM some volumetric downside protection. Additionally AR has dedicated all of its current and future acreage in West Virginia, Ohio and Pennsylvania to AM with an option to gather, compress and provide water service to any future acreage acquired by AR. AR has agreed to provide AM the right of first offer (ROFO) for any gas processing or NGL fractionation, transportation or marketing services needed by AR. AR has provided a similar ROFO for freshwater delivery services. These fixed fee contracts along with Fitch's expectations for strong production growth at AR and in the Marcellus will result in strong, consistent cash flow and earnings growth for AM over the next several years.
Parental Rating Linkage: AM's ratings reflect linkage to the ratings of AR given the strong strategic and operational ties between the entities. AR has dedicated the rights for gathering and compression, and water delivery and handling, services to AM on a long-term, fixed-fee basis with minimum volume commitments for a significant amount of volumes. Fitch believes that AM's low leverage profile coupled with the strong operational and strategic ties between AR and AM should drive linkage between the entities' IDRs.
Low Leverage; Strong Coverage: AM has historically maintained low leverage metrics and strong interest and distribution coverage relative to midstream peers. Fitch expects continued strong leverage metrics with leverage below 3.0x annually through 2020, even as capital spending grows significantly. Distribution coverage is expected by Fitch at or above 1.1x through 2020 even assuming strong annual distribution growth through that time period. Leverage below 3.0x and distribution coverage above 1.1x is relatively strong compared to 'BBB-' rated midstream energy peers. Median leverage across a select portfolio of Fitch's gathering and processing coverage for 2017 is expected to be roughly 4.2x.
Limited Geographic Diversity/Customer Concentration: AM's business line and geographic diversity are limited with its strong focus on AR's production in the Marcellus. Fitch recognizes that AR's production profile and hedged commodity price exposure position it as a relatively strong exploration and production company whose volumes are expected to increase significantly over the next several years, benefiting AM directly. Nevertheless, Fitch typically views single-basin, single-counterparty midstream service providers like AM as having exposure to outsized event risk should there be an operating issue at AR or any production difficulties in the Marcellus region.
AM's ratings largely reflect its strong strategic and operating ties to its owner and main counterparty AR. AR controls the activities that most significantly impact AM's economic performance and is expected to provide the majority of AM's revenues and EBITDA, thereby remaining the primary driver behind AM's ability to service its obligations.
AM exhibits low leverage similar to its midstream services peer EQT Midstream Partners, LP (EQM; BBB-/Stable), which is a producer-sponsored midstream MLP with gathering and processing operations in the Appalachian basin. Fitch expects AM to run leverage at below 3.0x on a sustained basis, similar to EQM, which had leverage on a trailing four-quarters basis (as of Sept. 30, 2017) of 1.7x. AM's leverage for that same period as calculated by Fitch was 2.1x. With regard to leverage AM is well positioned relative to other producer-linked MLP peers, Western Gas Partners, LP (WES; BBB-/Stable) and EnLink Midstream Partners, LP (ENLK; BBB-/Stable) which had trailing four quarters leverage of 3.2x and 5.0x, respectively.
Size, scale and asset/business line diversity is more limited at AM relative to peers, WES, ENLK, and EQM, which operate in multiple basins in the case of WES, ENLK or have lower business risk gas-transportation assets in their portfolio like EQM. AM has a single counterparty, AR, making up the vast majority of its revenues and earnings and linking its credit quality very closely to that of its main counterparty and owner. EQM, ENLK and WES all have material, concentrated counterparty exposure to their producer sponsors; in lesser amounts, however, than AM.
Fitch's key assumptions within our rating case for the issuer include:
--Volumes consistent with Fitch's AR base case forecasts. Commodity prices consistent with Fitch's published price deck.
--Waste water facility completed December 2017.
--Capital spending of $3.2 billion 2017-2020 on a cumulative basis, inclusive of both growth and maintenance spending.
--Distribution growth consistent with management guidance.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
--Positive rating action is not viewed as likely in the near term, but a positive rating action at AR could lead to a positive rating action at AM provided AM were to operate at leverage and coverage levels consistent with a higher rating. If AR were to be upgraded and AM were to manage leverage to below 2.5x on a sustained basis Fitch would likely upgrade AM.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--A negative rating action at AR.
--Leverage (debt/adjusted EBITDA) at or above 3.5x on a sustained basis, absent any change to basin or customer diversity. Distribution coverage below 1.1x on a sustained basis.
--Material change to contractual arrangement with AR that negatively impacts AM's cash flow or earnings profile.
Liquidity Adequate: AM's liquidity is adequate, supported by relative high distribution coverage and strong availability under its $1.5 billion senior secured revolver. On Oct. 26, 2017, AM amended its credit facility, extending its maturity until October 2022. AM's amended facility provides for lender commitments of $1.5 billion and for a letter of credit sublimit of $150 million. As of Sept. 30, 2017, AM had $427 million outstanding under its prior credit facility leaving availability of roughly $1.1 billion. AM is subject to covenants including maintaining a consolidated interest coverage ratio of at least 2.5x and a consolidated leverage ratio of 5.0x or below. AM was in compliance with its covenants and is expected to remain so through the Fitch forecast period.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Antero Midstream Partners, LP
--Long-Term IDR: 'BBB-';
--Senior secured revolver: 'BBB-';
--Senior unsecured notes: 'BBB-'.
The Rating Outlook is Stable.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Mar 21, 2018|
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