SUMMIT MIDSTREAM PARTNERS, LP
Fitch Ratings has affirmed
Fitch has also affirmed
The ratings reflect concerns of execution risk on bolstering liquidity, Fitch's expectation of declining EBITDA interest coverage. The ratings also reflect uncertainties regarding the announcement that Summit's board is evaluating important strategic options, including the sale of the entire company. The ratings are supported by basin diversity and that 90% of the run-rate EBITDA will be derived from long-term fixed-fee acreage-dedication contracts.
The Stable Outlook reflects the company's commitment to proactively improving its liquidity profile.
Key Rating Drivers
Attenuating Financial Flexibility: Summit's main source of liquidity is its ABL facility, which has a springing maturity, if the senior unsecured notes due
Fitch believes, with the possibility of rates remaining higher for longer, Summit's interest coverage may decline further. Fitch does not expect Summit to execute on a large growth project; however, increased interest expense is expected to reduce FCF available for debt repayment, which could limit financial flexibility, given the upcoming debt maturities and high revolver balance.
Yielding Cash Flow Profile: More than 90% of Summit's run-rate EBITDA is expected to come from long-term fee-based acreage dedicated contracts with a weighted average remaining life of over seven years, providing protection against commodity price volatility. Though Summit has some revenue assurance type minimum volume commitment contracts (MVC), it is only expected to account for about 15%-20% of the EBITDA in the near term, consistently declining year-over-year to approximately 10% or less over the medium term.
The lack of a sizeable portion of cash flows under revenue assurance type contracts exposes the company to significant volumetric risks; and combined with exposure to mature declining basins, provides less certainty of future cash flows. Roughly 10% of the EBITDA is expected to come from commodity price exposed businesses, which remains a source of cash flow variability for the company.
Modest Counterparty Credit Quality: Summit's top 20 customers are expected to account for over 90% of its EBITDA. While some of Summit's customers are investment-grade counterparties, the majority of its customers are either high-yield or small private (unrated) companies deemed to be high-yield, and are expected to account for over 80% of the EBITDA, exposing the company to counterparty risks. Therefore, in down-cycles, some of the company's top customer could be severely impacted, which would have negative consequences for Summit. Nonetheless, Fitch expects credit quality of most of Summit's top customers to remain intact, at least in the near term.
Diligent Management Strategy: On
Fitch estimates Summit's interest coverage at approximately 2.2x, and leverage at approximately 5.0x in 2024 (per Fitch's calculations, which is different from management or bank's calculations). Fitch expects short-term refinancing will likely have an impact on decreasing interest coverage in 2025. Fitch believes management will be able to proactively address the debt maturities.
Parent Subsidiary Linkage: There is a parent subsidiary relationship between Summit (parent) and
Due to the above linkage considerations, Fitch rates both entities based on consolidated credit profile and has assigned the same IDRs.
Derivation Summary
Harvest's bigger size, lower leverage, better financial flexibility, and more supportive counterparty relationship, accounts for the three-notch difference between it and Summit's IDRs.
The lower leverage, and presence in more prolific region, are primary drivers for the two-notch difference in Blue Racer's and Summit's IDRs. However, Fitch acknowledges Blue Racer's slightly better contract coverage, financial flexibility, and supportive ownership.
Key Assumptions
Fitch's base case of Natural Gas at Henry Hub of
Fitch's base case West Texas Intermediate (WTI) oil price of
Company-wide, volumes rise at low-single-digit percentage in the near term before declining at a low-single-digit percentage yoy over the medium term, reflecting Fitch's base case for oil and gas prices;
Base interest rate for the credit facility reflects Fitch's Global Economic Outlook, e.g., 5.75%, 4.5%, and 3.25% for 2023, 2024, and 2025, respectively;
Timely refinancing of the upcoming debt maturities, albeit at a higher coupon rate, consistent with prevailing interest rate environment and spreads;
Distributions from joint ventures received in accordance with the agreements;
Preferred unit distributions and common dividends remain suspended in the near term;
No M&A, asset divestitures, or large growth projects over the forecast period.
Recovery Rating Assumptions:
For the Recovery Rating, Fitch estimates the company's going-concern value was greater than the liquidation value. The going-concern multiple used was a 6.0x EBITDA multiple, which is in the range of most multiples seen in recent reorganizations in the energy sector. There have been a limited number of bankruptcies within the midstream sector;
Two recent gathering and processing bankruptcies of companies indicate an EBITDA multiple between 5.0x and 7.0x, by Fitch's best estimates. In Fitch's recent bankruptcy case study report, 'Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries,' published in
Fitch assumed a going-concern EBITDA of approximately
Fitch calculated administrative claims to be 10%, and a fully drawn ABL facility, which are standard assumptions. The outcome is a 'B+'/'RR2' rating for the Senior Second Lien Secured Debt, which corresponds to an expected recovery in the range of 71% to 90%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage on a TTM basis below and expected to sustain below 5.5x;
Meaningful change to earnings stability profile in terms of greater proportion of EBITDA derived from high growth basins or decreased volumetric exposure.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Interest Coverage sustained below 2.2x;
Failure to proactively address the upcoming debt maturities;
Reduced liquidity;
EBITDA leverage expected to sustain above 6.5x;
Material change to contractual arrangement and operating practices that negatively impacts cash flow or earnings profile, including a move away from current majority of revenue being fee based;
Meaningful deterioration in customer credit quality or a significant event at a major customer that impairs cash flows;
Increases in capital spending beyond Fitch's expectation that have negative consequences for credit profile (e.g. if not funded with a balance of debt and equity).
Liquidity and Debt Structure
Sufficient Liquidity: As of
In the event that, approximately
The 5.75%
The covenants on the ABL facility agreement, as of the last day of any fiscal quarter, requires the borrower to maintain a first lien net leverage ratio of less than 2.5x, and interest coverage ratio of greater than 2.0x. As of
Issuer Profile
Summit owns, develops and operates midstream energy infrastructure assets in unconventional resource basins, primarily shale formations in the continental
Summary of Financial Adjustments
The values in the above Sensitivities and other metric values in this press release are calculated by de-consolidating the consolidated debt of
Fitch's calculation of adjusted EBITDA excludes equity in earnings from unconsolidated affiliates and includes cash distributions from those unconsolidated affiliates. Fitch gives 50% equity credit to Summit's 9.50% Series A Preferred Cumulative Perpetual Units under Fitch's hybrid methodology, Corporates Hybrids Treatment and Notching Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
Senior Secured 2nd Lien
LT
B+
Affirmed
RR2
B+
LT IDR
B-
Affirmed
B-
LT IDR
B-
Affirmed
B-
Senior Secured 2nd Lien
LT
B+
Affirmed
RR2
B+
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