OREANDA-NEWS. May 13, 2016. Fitch Ratings has affirmed EQT Midstream Partners, L.P,'s (EQM) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-.' The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'BBB-' rating is supported by EQM's low leverage of 1.4x for the 12 months ending March 31, 2016, and management's strategy to maintain its long-term leverage ratio of 3.5x or lower. EQM also operates with a strong distribution coverage ratio. As of March 31, 2016, it was 1.9x for the trailing 12 months. The 'BBB-' rating also acknowledges EQM's significant customer concentration from EQT Corp. (EQT; IDR 'BBB-'/Stable Outlook). In 2015, EQT accounted for 73% of EQM's total revenues. EQT currently owns approximately 90% of EQT GP Holdings, LP (NYSE: EQGP) which owns a 1.8% general partner interest, and a 27.6% limited partnership interest in EQM.

The ratings are further supported by EQM's cash flows which are backed by long-term fee based contracts. In 2015, 82% of revenues were from capacity reservation charges. Furthermore, cash flows should remain stable since the transmission and storage segment has a weighted average contract life of 17 years and the gathering segment has nine years. While growth in EQM has historically been driven by drop-downs from EQT, future growth is expected to come via organic growth projects, particularly the Mountain Valley Pipeline project which is expected to come on line in late 2018. EQM holds a 45.5% stake in the pipeline project. EQM continues to pursue other growth opportunities as well. Projects underway or to be built are backed by long-term contracts ensuring that cash flows will be steady for the next several years after a project is placed into service.

Concerns include EQM's significant customer concentration with EQT given that in 2015, EQT accounted for 73% of revenues. EQT's assets which have been or which will be dropped down are located near its own production, thus ensuring that it is the anchor customer for the majority of midstream assets whether transmission, storage or gathering. Given concerns about customer concentration with EQT, concerns for EQM are also tied to the fundamentals of the Marcellus and Utica shale basins and the ability for gas production in those plays to grow against the backdrop of soft natural gas prices.

SIGNIFICANT GROWTH
EQM is currently developing several significant capital projects. The largest project is the Mountain Valley Pipeline. EQM owns a 45.5% stake in the Mountain Valley Pipeline LLC, a joint venture that is constructing a 300-mile FERC-regulated pipeline. Capacity is to be 2 Bcf per day and is fully subscribed for 20 years; EQT is the anchor shipper. The estimated project cost is in the \\$3 billion to \\$3.5 billion range with an expected in-service date of fourth quarter 2018 (4Q18); EQM will fund its 45.5% share of the total project.

STRONG METRICS
For the latest 12 months (LTM) ending March 31, 2016, EQM's adjusted leverage was low at only 1.4x, below leverage of 2.1x at year-end 2014. With EQM's plans for spending in 2016 and beyond, Fitch expects leverage to increase over the next few years yet remain below EQM's long-term leverage target of 3.5x.

Distribution coverage is strong, ending the LTM ending March 31, 2016 at 1.9x. Fitch expects it to remain in the range of 1.4x-1.6x by the end of 2016. Fitch calculates the distribution coverage ratio based on distributions paid (not declared).

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

--2016 adjusted EBITDA in the range of \\$540 million to \\$560 million, in line with management's guidance;
--2016 distribution growth of 20%;
--Dropdown of the last midstream asset from EQT to occur in the second half of 2016 (2H16); this asset will add approximately \\$40 million of EBITDA to EQM on an annualized basis;
--EQM's growth is dependent on organic growth projects beyond 2016;
--The Mountain Valley Pipeline remains on schedule for a late 2018 in service date and costs remain between \\$3.0 billion-\\$3.5 billion; EQM's stake remains 45.5%;
--EQT remains the primary customer for EQM in the forecast years.

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:

--Fitch does not anticipate negative rating actions given EQM's conservative credit profile; however, factors that could prompt action are listed below;
--Negative rating action at EQT given its customer concentration;
--Material changes in EQM's strategy to manage the balance sheet conservatively;
--Leverage (defined as debt to adjusted EBITDA) at 4.5x or greater on a sustained basis in the absence of greater size, as well as greater basin and customer diversity;
--Inability to grow EBITDA as expected given significant spending (via acquisitions and strategic capex);
--Significant increases in arrangements which are not fee based could result in more volatile cash flows and hurt the credit profile.

LIQUIDITY

Liquidity at EQM is adequate. As of March 31, 2016, EQM had \\$0.4 million of cash on the balance sheet. Importantly, it had \\$741 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.

Fitch has affirmed the following ratings:

EQT Midstream Partners, L.P.
--Long-Term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured revolver at 'BBB-'.

The Rating Outlook is Stable.