TEXT-S&P affirms Chesapeake Midstream Partners 'BB-' rating
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 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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