S&P: Veresen Midstream L. P.'s US$300 Million Term Loan B Assigned 'BB-' Rating; Other Ratings Affirmed
The recovery rating revision reflects the increased leverage resulting from the term loan.
Veresen Midstream is raising additional debt to finance additional asset drop downs from the Cutbank Ridge joint venture (JV), a partnership between Encana Corp. and Mitsubishi Corp. The partnership is expanding in the Montney area of northeastern British Columbia, and has sanctioned a new natural gas gathering and processing facility (Saturn II). We expect the C$911 million facility to be online in second-quarter 2018.
"The increased capital program will further strain metrics in the 2016-2017 timeframe," said S&P Global Ratings credit analyst Gerry Hannochko. "However, we expect that they will rebound in 2018 as capital projects enter service," Mr. Hannochko added.
We assess Veresen Midstream's business risk profile as satisfactory. We believe the production economics in the Montney formation for the Cutbank Ridge JV are compelling even in the current weak commodity price environment. The Cutbank agreement's contractual structure is credit supportive, with a long-term, fee-for-service pipeline, gathering, and processing contract with a group of investment-grade counterparties that allows an expected return on invested capital to the L. P. Offsetting these benefits is our belief that Veresen Midstream is limited in its shippers and asset base, which is constrained to one geographic region and commodity. The stable outlook reflects our view that Veresen Midstream will proceed with the acquisition and build-out of the infrastructure benefiting the Cutbank JV according to the midstream service agreement's terms. With the agreement, the JV bears operating, capital, and timing risks, and the L. P. expects to earn a stable return. We forecast FFO-to-debt of less than 10% in the near term, rising to above 13% in 2019 as the capital projects enter service.
We could lower the rating if AFFO-to-debt does not recover to 13% by 2019, which would likely be due to increased levels of debt financing for the capital spending, or lower-than-expected volumes when facilities enter service. We would expect any additional capital expenditures to be financed by equity in the near term due to the weaker coverage ratios following the term loan B issuance. In addition, if we believe that the L. P.'s strategic importance to Veresen declines, we could remove the group rating methodology support and lower the rating.
We could raise the rating if AFFO-to-debt stays above 13%, or if there is more substantial asset, commodity, geographic, and shipper diversity.