Midstream Credit Ratings: Making the (Investment) Grade

Summary 

• Midstream companies are focused on preserving or attaining investment-grade credit ratings in order to secure lower borrowing costs when building projects.
• Many midstream companies boast investment-grade credit ratings based on the constituents of our AMNA Index, a broad composite of North American midstream companies.
• Alerian’s midstream indices are heavily weighted towards names with investment-grade credit ratings.

Midstream credit ratings are a recurring topic in Alerian Insights (2017, 2016, 2015 3-part series) — not because we’re too lazy to think of new topics (OK, that may be a small part of the reason) — but because credit ratings are important for midstream companies as prolific project builders. Often, midstream projects are financed with 50% debt. A better credit rating means cheaper debt and better project returns, hence the desirability of investment-grade credit ratings for midstream companies.

In this piece, we’ll look at credit ratings for the 59 constituents of the Alerian Midstream Energy Index (AMNA), a broad-based composite of North American energy infrastructure companies. We’ll also look at the investment-grade weightings for five of our midstream indices. Before we get into those details, we’ll briefly revisit why credit ratings matter.

What is the value of an investment-grade rating?
For midstream companies, an investment-grade credit rating is not just a feather in the cap or a perceived stamp of approval from a rating agency. Rather, an investment-grade credit rating means saving cash. For example, Andeavor Logistics (ANDX) anticipated more than $25 million in savings for annual interest costs as a result of refinancing its debt in late 2017 after achieving an investment-grade rating. Tallgrass Energy (TGE) and Rockies Express Pipeline LLC received investment-grade credit ratings from Fitch in September, and TGE noted in its October presentation that a potential improvement to its credit rating would reduce its cost of debt. TGE also stated in the presentation that S&P had recently revised its outlook to positive watch. For midstream companies, preserving or attaining an investment-grade credit rating is clearly important.

Making the grade: midstream credit ratings and takeaways.
The table below includes S&P credit ratings for the midstream companies included in the AMNA index as well as yield and market capitalization. We focus on S&P ratings because those are used to determine the investment-grade weightings for our indices.

Of the 59 constituents in the AMNA index, 41 names have ratings from S&P. Of those 41 names with ratings, 22 companies have investment-grade ratings (BBB- or better). In other words, of the companies with ratings, more names have investment-grade ratings than below investment-grade ratings. The average market cap for investment-grade rated names is ~$23 billion, but the range is quite wide: from Enbridge (ENB) at $98 billion to TC PipeLines (TCP) with a market cap below $2.3 billion. One would expect investment-grade companies to have lower yields (cheaper equity). The average yield for investment-grade names was 7.1% as of February 28 compared to an average yield of 9.9% for those names with ratings below investment grade and paying a dividend. There is a wide range of yields and market caps among the names without S&P ratings, which include TGE despite its investment-grade rating from Fitch and Plains GP Holdings (PAGP), although Plains All American (PAA) has an investment-grade rating.