TEXT-S&P affirms Chesapeake Midstream Partners 'BB-' rating

Fri Jun 8, 2012 10:05am EDT

June 8 - Overview	
     -- U.S. midstream energy company Chesapeake Midstream Partners L.P. 	
 (CHKM) announced that Global Infrastructure Partners (GIP; unrated) has
agreed to acquire all of Chesapeake Energy Corp.'s (CHK) ownership interest in
CHKM for $2.0 billion.	
     -- As a result of the acquisition, GIP will own 100% of CHKM's general 	
partner (GP) interest and 69% of CHKM's limited partner units.	
     -- We are affirming our 'BB-' corporate credit rating on CHKM.	
     -- The negative outlook reflects our uncertainty about CHKM's strategic 	
direction given the pending sale of its GP and limited partnership interests 	
to GIP, a private-equity firm.	
	
Rating Action	
On June 8, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 	
corporate credit rating on U.S. midstream energy company Chesapeake Midstream 	
Partners L.P. (CHKM). The outlook is negative. As of March 31, 2012, CHKM had 	
total balance sheet debt of $1.19 billion.	
	
Rationale	
The ratings affirmation reflects Global Infrastructure Partners (GIP; unrated) 	
agreement to acquire all of Chesapeake Energy Corp.'s (CHK) ownership interest 	
in CHKM for $2 billion. As a result of the acquisition, GIP will own 100% of 	
CHKM's general partner interest and 69% of CHKM's limited partner units.	
	
The ratings on CHKM reflect a "fair" business risk profile and an 	
"intermediate" financial risk profile under our criteria. The partnership's 	
fair business risk profile reflects its stable cash flow generated from an 	
entirely fee-based contract mix supported by long-term minimum volume 	
commitments and fee redeterminations. Limited customer and geographic 	
diversity partially offset these strengths. The partnership's intermediate 	
financial risk profile reflects low financial leverage and a master limited 	
partnership (MLP) structure that gives CHKM a strong incentive to pay out to 	
unitholders most of its cash flow after maintenance capital spending each 	
quarter.	
	
Concerns related to CHK's ownership and related control through their GP 	
interest to date had weighed on CHKM's rating and ultimately resulted in our 	
capping it to our rating on Chesapeake Energy. With the sale of the general 	
and limited partnership interests to GIP, a $10 billion private-equity fund 	
with a focus on infrastructure investments), some of our concerns regarding 	
Chesapeake Energy's control over CHKM have been alleviated. However, CHKM's 	
operational dependence on Chesapeake Energy remains high. Chesapeake Energy is 	
by far CHKM's most significant customer, responsible for roughly 75% of 2012 	
estimated revenues. Further, we believe acquisitions dependant upon Chesapeake 	
Energy's drilling program will continue to influence CHKM's growth strategy, 	
though we acknowledge that the ownership change may accelerate the 	
partnership's cash flow diversification through a renewed focus on organic 	
projects and/or third-party acquisitions.	
	
Nonetheless, we believe a bankruptcy at Chesapeake Energy would be, at a 	
minimum, highly disruptive to CHKM. While we believe that natural gas will 	
likely continue to flow through CHKM's lines, we have limited visibility into 	
whether the contracted rates between Chesapeake and CHKM remain at market 	
rates, particularly in today's low natural gas price environment. Rates on 	
gathering lines are highly site-specific and generally not publicly available 	
on any level of granularity. As a result, Chesapeake Energy's creditworthiness 	
continues to influence our rating on CHKM.	
	
We consider CHKM's financial risk profile intermediate. We expect GIP will 	
continue to manage CHKM in a conservative manner by maintaining adequate 	
liquidity and a pro forma debt to EBITDA ratio between 2.5x-3.5x. Under our 	
base-case model, we assume Mid-Continent volumes are marginally stronger than 	
2011 volumes, and cash flow from the Barnett, Haynesville, and Marcellus 	
regions equates to the minimum amount guaranteed by the minimum volume 	
contracts. As a result, we expect the partnership to have debt to EBITDA of 	
3.5x to 4.0x, EBITDA to interest coverage of about 7.0x, and distribution 	
coverage of 1.2x in 2012. We also expect long-term debt to remain at about 	
3.5x as CHKM continues to access the capital markets to fund growth projects.	
	
The partnership recently acquired Marcellus Shale midstream assets from a 	
wholly owned subsidiary of Chesapeake Energy for $865 million. The Marcellus 	
assets have 15-year, fixed-fee contracts with several exploration and 	
production companies with a weighted-average rating of 'BBB'. Chesapeake 	
Energy's commitment to generate minimum EBITDA levels in 2012 and 2013 for 	
CHKM's benefit provides clear cash flow visibility during the next 24 months.	
	
In addition to the Marcellus region, most of CHKM's assets are in the Barnett 	
Shale, and some are in the Haynesville Shale and Mid-Continent regions. All of 	
the partnership's contracts are fee-based, and, even as CHKM expands its 	
operations, we do not expect it to incur material direct exposure to commodity 	
price fluctuations. In addition, CHKM has executed minimum-volume contracts 	
with Chesapeake Energy and with Total S.A. (AA-/Stable/A-1+), CHKM's 	
second-largest customer, which together guarantee annual revenues of between 	
$400 million and $500 million through 2018. These contracts, which include a 	
clause providing for the fees to be redetermined regularly, add stability to 	
projected revenues and provide a base level of cash flow available for debt 	
service.	
	
Liquidity	
We assess CHKM's liquidity as "adequate," with sources exceeding uses by about 	
1.2x during the next 12 months. In our calculation, primary sources of 	
liquidity include about $350 million in funds from operations and $400 million 	
available under CHKM's $1 billion senior secured revolving credit facility due 	
in 2016. We assume CHKM's primary uses of cash for the next 12 months will 	
consist of maintenance and growth capital spending of about $400 million and 	
distributions to unitholders of $250 million. These calculations do not 	
reflect any further acquisitions, which we believe are likely to continue and 	
would prompt us to reassess the liquidity calculations on a regular basis 	
throughout the year.	
	
Financial covenants on the revolving facility call for minimum interest 	
coverage of 2.5x and maximum total leverage of 5.0x. We expect CHKM to be in 	
compliance with these covenant tests for the remainder of the year.	
	
Recovery analysis	
The rating on the $350 million and $750 million senior unsecured credit 	
facilities is 'BB-' (the same as the corporate credit rating), and the 	
recovery rating is '4', which reflects our expectations that lenders would 	
receive average (30% to 50%) recovery of principal in the event of a default. 	

Outlook	
The negative rating outlook takes into account our uncertainty about CHKM's 	
strategic direction given the pending sale of its general partnership and 	
limited partnership interests to private-equity firm GIP. Independent of any 	
potential ratings actions on Chesapeake Energy, we could lower the rating if 	
CHKM heightens its volume and cash flow risk by purchasing undeveloped assets 	
that require significant capital investment, increases its commodity price 	
exposure, or participates in a leveraging acquisition, such that debt to 	
EBITDA exceeds 4.5x for an extended period of time. 	
	
Furthermore, our ratings on Chesapeake Energy can influence our ratings on 	
CHKM because of the business ties between the two entities. We could revise 	
the outlook to stable if we gain incremental comfort around CHKM's strategic 	
focus, given the ownership change. Specifically, greater customer 	
diversification, a measured growth strategy, and the pursuit of financial 	
policies such that debt to EBITDA remains below 4x could prompt an outlook 	
revision.	
	
Related Criteria And Research	
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, 	
April 18, 2012 	
	
Ratings List	
	
Ratings Affirmed	
	
Chesapeake Midstream Partners L.P.	
 Corporate Credit Rating                BB-/Negative/--    	
	
Chesapeake Midstream Partners L.P.	
 Senior Unsecured                       BB-                	
   Recovery Rating                      4                  	
	
CHKM Finance Corp.	
 Senior Unsecured                       BB-                	
   Recovery Rating                      4                  	
	
	
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