Fitch Downgrades EQT One Notch to 'BBB-'; Outlook Stable
NEW YORK -- December 20, 2012
Fitch Ratings has downgraded EQT Corporation's (EQT) ratings as follows:
--Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB';
--Senior unsecured debt to 'BBB-' from 'BBB';
--Short-term IDR to 'F3' from 'F2'.
In addition, Fitch assigns a commercial paper rating of 'F3'.
The Rating Outlook is Stable. Approximately $2.5 billion of debt outstanding
is affected by today's rating action.
The downgrade was prompted by EQT's announcement to sell its regulated utility
operations in Pennsylvania, West Virginia and Kentucky to Peoples Natural Gas.
The utility has generated stable cash flows and has not required significant
investment. For the latest-12-month (LTM) period ending 3Q'12, the assets
accounted for 10% of the company's EBITDA and only 2% of capex.
In exchange for the sale of the utility assets, EQT will receive approximately
$720 million in cash (subject to adjustments), transmission pipelines which
complement some of EQT's existing assets, and commercial arrangements.
The sale is dependent on regulatory approvals from the Pennsylvania Public
Utility Commission, the West Virginia Public Service Commission and the
Kentucky Public Service Commission. It is also subject to Hart-Scott Rodino
review. Fitch notes that approval may be difficult given the FTC's past effort
to block the two utilities from merging before. The concern was that the
merger would create a monopoly in the Pittsburgh market. Despite hurdles in
the past, EQT expects the transaction to close by the end of 2013. However, it
is important to note that even if the sale were to be blocked, Fitch does not
expect to see a change in EQT's strategy to transition from a diversified
energy company to one that is dominated by its E&P operations.
Ratings concerns include the business risk profile stemming from EQT's growing
focus on upstream operations which accounted for 63% of EBITDA in the LTM, the
planned divestiture of the regulated utility which provides steady cash flow,
EQT's relatively undiversified focus in the Marcellus shale region, the high
capital requirements needed to fund the drilling program, and ongoing pattern
of negative free cash flow. Additional concerns include the prospects for a
sustained environment of weak natural gas pricing.
At the end of 3Q'12, EQT's leverage was 2.9x, up from 2.75x at the end of
2011. With expectations for growth in EBITDA, Fitch expects leverage decrease
and fall in the range of 2.2 - 2.5x by the end of 2013. Natural gas prices and
capex spending are the primary variables expected to impact leverage.
Liquidity remains significant and should support growth over the
near-to-medium term. At the end of 3Q'12, liquidity was $2.1 billion which
includes $639 million of cash and full availability on its $1.5 billion
revolver which matures in 2014. In addition, EQT's MLP has its own $350
million revolver which matures in 2017. Debt maturities are manageable with
nothing due until $150 million mature in 2015.
Capital expenditures continue to be significant as EQT continues to focus on
its low-cost drilling program in the Marcellus. Between 2008 and 2011, capital
expenditures averaged $1.2 billion per year. In the LTM ending 3Q'12, it was
$1.4 billion and the company forecasts spending of $1.5 billion in 2013 with
77% of the budget directed to upstream operations.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Positive rating action is not viewed as likely; however, a significant
reduction in leverage or a shift away from expanding upstream operations could
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--A significant and prolonged drop in natural gas prices without an
appropriate adjustment to spending;
--Expansion beyond Fitch's expectations of the upstream business;
--Increases in leverage beyond 2.75x for a sustained period while upstream
operations remain the company's focus.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' Aug. 8, 2012;
--'2013 Outlook: North American Oil & Gas' Dec. 13, 2012
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012;
--'Eagle Ford Shale Report: Midstream and Pipeline Sector Economics Driving
Growth' Oct. 15, 2012;
--'Pipelines, Midstream, and MLP Stats Quarterly - Second Quarter 2012' Sept.
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' June 10, 2012;
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' May 1,
--'Master Limited Partnerships 101' Nov. 1, 2011;
--'Natural Gas Pipelines: Hot Topics' Oct. 13, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
2013 Outlook: North American Oil & Gas
2013 Outlook: Natural Gas Pipelines & MLPs
2013 Outlook: Midstream Services and MLPs
Eagle Ford Shale Report (Midstream and Pipeline Sector -- Economics Driving
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012
Marcellus Shale Report: Midstream and Pipeline Sector --
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Master Limited Partnerships 101
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk
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Kathleen Connelly, +1-212-908-0290
One State Street Plaza
New York, NY 10004
Ralph Pellecchia, +1-212-908-0586
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