In this part, we’ll look at the counterparty exposure for the two MLPs—Boardwalk Pipeline Partners (BWP) and EQT Midstream (EQM)—that we’re discussing in this series. Midstream MLPs’ counterparty exposure or credit exposure is one of the most important parameters to look at in the current price environment.
BWP’s counterparty exposure
For Boardwalk Pipeline Partners (BWP), 80% of its revenue come from firm reservation contracts. Under these contracts, a fixed monthly fee is charged for reservation of pipeline capacity regardless of whether the capacity is used. However, Boardwalk Pipeline has higher counterparty risk. According to its 1Q16 earnings call, six of Boardwalk Pipeline’s 50 customers don’t carry an investment-grade rating. This represents ~17% of the partnership’s $1 billion in revenue. This is higher than four customers that represented ~5% of $1 billion in revenues during its 4Q15 earnings.
According to Jamie Buskill, Boardwalk Pipeline’s CFO, “the ratings of several of our producer customers, including some of those supporting our growth projects, have recently been downgraded. The downgrades further restrict liquidity for those customers and could result to non-performance of their contractual obligations, including failure to make future payment or for customers supporting our growth projects, failure to post required letters of credit or other collateral as construction progresses over the remainder of 2016.” Williams Partners (WPZ), DCP Midstream Partners (DPM), and EnLink Midstream Partners (ENLK) are among the midstream companies that have high counterparty exposure.
EQM’s counterparty exposure
100% of EQT Midstream Partners’ (EQM) revenue come from fixed-fee contracts. EQT Corporation (EQT) is EQT Midstream’s largest customer. This might indicate EQT Midstream’s high counterparty exposure. Currently, it carries an investment-grade rating.
To learn more about Boardwalk Pipeline read, What Investors Should Know about Boardwalk Pipeline Partners.