Rating Action: Moody's rates Harvest Midstream Ba3, new notes issue B1
Global Credit Research - 03 Aug 2020
New York, August 03, 2020 -- Moody's Investors Service ("Moody's") assigned first time ratings to Harvest Midstream I, L.P. (Harvest Midstream, or "the partnership") including a Ba3 Corporate Family Rating (CFR), a Ba3-PD Probability of Default Rating (PDR) and a B1 rating to its proposed issuance of $600 million senior unsecured notes. Moody's considers Harvest Midstream to have good liquidity. The outlook is stable.
Harvest Midstream is a private, diversified oil and natural gas gathering and processing (G&P) company whose 1% general partner and its limited partnership units are owned and controlled by Hildebrand Enterprises LP (Hildebrand). Under the common ownership of Hildebrand, Harvest Midstream has a strategic relationship with its sister affiliate Hilcorp Energy I, L.P. (HEI, Ba1 RUR down) for whom it provides midstream services in support of much of its production. Harvest Midstream intends to use the proceeds of the proposed notes issue to repay its term loan and amounts outstanding under its revolving credit facility.
"Harvest Midstream generates a stable, contract-based revenue stream, over 80% of which is generated under fixed-fee contracts, providing a degree of certainty to cash flow available for debt service," commented Andrew Brooks, Moody's Vice President. "Moreover, with modest levels of projected growth capital spending, and a limited initial distribution payout, Harvest Midstream should be able to rapidly de-lever to its targeted level of under 3.5x debt/EBITDA."
..Issuer: Harvest Midstream I, L.P.
.... Probability of Default Rating, Assigned Ba3-PD
.... Corporate Family Rating, Assigned Ba3
....Senior Unsecured Notes, Assigned B1 (LGD5)
..Issuer: Harvest Midstream I, L.P.
....Outlook, Assigned Stable
The scale of Harvest Midstream's diverse midstream operating platform was significantly enlarged with its $1.1 billion acquisition in October 2018 of G&P assets in the San Juan Basin of New Mexico and Colorado, which more than doubled its base revenues. The gathering pipeline assets and natural gas processing capacity acquired through Harvest Four Corners, LLC (Four Corners) represents approximately 70% of the partnership's total revenue, and generates about two-thirds of its EBITDA. In July 2017, Hilcorp San Juan, an affliate of HEI, acquired San Juan Basin oil and natural gas assets in a $3.0 billion transaction with The Carlyle Group. Harvest Midstream is one of only two principal natural gas gatherers in the San Juan, moving about one-third of all volumes out of the basin, and 54% of Hilcorp's total San Juan production. Fixed-fee contract provisions govern about 75% of Four Corners' revenue, with its top four contract counterparties comprising 80% of revenues under contracts with about a five-year average remaining life. Other midstream components of Harvest Midstream's asset base are its gathering and transportation operations in Alaska, whose contracts are 100% fixed-fee fee or cost of service based, joint ventures in South Louisiana, the Eagle Ford Shale and the Utica and other locations in Texas and Louisiana.
On June 30, HEI closed on its $5.5 billion acquisition of BP p.l.c.'s (BP, A1 negative) entire Alaskan upstream and midstream asset base. HEI expects to finance the acquisition through a combination of seller-financing and cash. With the acquisition having now closed, Moody's expects to soon resolve its review of HEI's rating; depending on the outcome of the review, Harvest Midstream's Ba3 CFR could come under downward pressure. BP Alaska's midstream assets are comprised of its 49% interest in the Trans Alaska Pipeline System (TAPS) and additional pipeline segments and gathering systems. The BP Alaska midstream assets will be sold to Harvest Midstream in a $100 million transaction, which should close in 2020's third quarter, furthering another significant increase in the partnership's size and scale. Pro forma for BP Alaska midstream, Harvest Midstream's full year revenue and EBITDA are projected to increase by over 50%, mitigating to an extent the partnership's outsized exposure to the San Juan. BP Alaska's midstream contribution to consolidated EBITDA and cash flow will also accelerate the deleveraging of the partnership.
Harvest Midstream's proposed notes issue will repay its Term Loan A, which will then be terminated, and borrowings under the partnership's revolving credit facility, while augmenting its capital structure to support potential future growth opportunities. At closing, debt/EBITDA will approximate 4.5x, adjusting for the proportional consolidation of joint venture debt, however, with modest projected growth in capital spending and distribution payouts, Harvest Midstream should generate positive free cash flow in amounts sufficient to de-lever its balance sheet to under its targeted 3.5x debt/EBITDA in 2021.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil and natural gas prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Harvest Midstream's exposure to commodity price and volumetric risk leaves it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
The singular control Mr. Jeffery Hildebrand wields over the Hilcorp enterprises, including Harvest Midstream, through his ownership of Hildebrand Enterprises is also considered in the partnership's credit profile. However, Harvest Midstream has prospered under Hildebrand's control and leadership, limiting its use of excessive debt financing. Environmental considerations have a growing impact on Moody's credit analysis for midstream energy companies, indirectly related to potential carbon dioxide regulations and methane leakages. The risk of oil spills along TAPS and the environmental fragility of the Alaskan tundra raise potential social risks. A strong financial position and low financial leverage are important characteristics for managing these environmental and social risks.
Moody's regards Hilcorp Midstream as having good liquidity. In addition to repaying and terminating its secured Term Loan A, net proceeds from the proposed notes offering will also be used to repay a portion of the debt outstanding under the partnership's $600 million secured revolving credit facility ($457 million outstanding at March 31). The revolver is scheduled to mature in October 2023. Pro forma for the proposed notes issue, Harvest Midstream will have about $600 million of available liquidity. Two of Harvest Midstream's joint venture companies also have outstanding revolving credit debt, which have recourse solely to the respective joint ventures themselves, and are not guaranteed by Harvest Midstream.
The proposed $600 million senior unsecured notes are rated B1, one-notch below the Ba3 CFR in consideration of the priority claim that the secured revolving credit has relative to the partnership's assets.
The outlook is stable reflecting Harvest Midstream's expected declining debt leverage, underpinned by the contractual source of cash flow which helps insulate the partnership from the full brunt of commodity price and volume risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Harvest Midstream could be upgraded to Ba2 should leverage drop below 3.5x, should EBITDA exceed $500 million and presuming that EBITDA is not exposed to additional commodity price or volume risk. Harvest Midstream could be downgraded should leverage exceed 4.5x, or should contract structure erode resulting in increased leverage. Should HEI be downgraded below Ba3, Harvest Midstream would also be downgraded.
The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Harvest Midstream I, L.P.'s assets are operated by its general partner, Harvest Midstream Company, headquartered in Houston, Texas.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Andrew Brooks VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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