TEXT-S&P raises Atlas Pipeline Partners issue rating to 'B+'

Thu Dec 6, 2012 12:55pm EST

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Overview
     -- U.S. midstream energy master limited partnership (MLP) Atlas Pipeline 
Partners L.P. intends to purchase Cardinal Midstream LLC (not rated) for $600 
million. The Cardinal assets consist of gathering, processing, and treating 
operations in the liquids-rich Woodford Shale region. In conjunction with the 
transaction, Atlas plans to issue $175 million of senior unsecured notes due 
2020.
     -- We are affirming our 'B+' corporate credit rating on Atlas, raising 
our senior unsecured issue-level ratings to 'B+' from 'B', and changing the 
recovery rating on the unsecured notes to '3' from '5'. 
     -- The change in the recovery rating reflects an increase in enterprise 
value as a result of the Cardinal acquisition.
     -- The stable outlook reflects our view that Atlas will maintain adequate 
liquidity and debt to EBITDA ratio between 4.0x and 4.5x.

Rating Action
On Dec. 6, 2012, Standard & Poor's Ratings Services affirmed its 'B+' 
corporate credit rating on U.S. midstream energy partnership Atlas Pipeline 
Partners L.P. The outlook is stable. At the same time, we raised our rating on 
the partnership's senior unsecured notes to 'B+' from 'B'. We revised the 
recovery rating on this debt to '3' from '5'. Atlas had $787 billion of debt 
as of Sept. 30, 2012.

Rationale
Atlas has entered into a definitive agreement to purchase Cardinal Midstream 
LLC for $600 million. In our view, the transaction improves Atlas' business 
risk profile by modestly increasing scale and operating diversity while 
reducing commodity price exposure because Cardinal's cash flows are mainly 
fee-based. We believe the assets complement Atlas' core competencies and 
provide the partnership with a clear path to grow gathering and processing 
volumes through low-risk organic projects. That said, Atlas' geographic 
footprint remains concentrated in the Mid-Continent region and its contract 
mix is highly sensitive to changes in volumes and the price of natural gas and 
natural gas liquids (NGLs). A key credit consideration, in our opinion, is the 
partnership's ability to ramp up and sustain its volumes amidst weak NGL 
prices.

The Cardinal assets, located about 50 miles away from Atlas' existing Velma 
area of operations, consist of three cryogenic processing plants totaling 220 
million cubic feet per day (mmcf/d) in processing capacity (with plans to 
expand to 340 mmcf/d by year-end 2013), 66 miles of associated gathering 
pipelines, and a gas-treating business with 17 treating facilities. About 80% 
of contracts are fixed-fee and 20% are percentage-of-proceeds/processing 
upgrade. Atlas' pro forma contract mix will consist of about 43% 
percentage-of-proceeds, 21% keep-whole, and 36% fixed-fee agreements.

In our base case projections, we assume that Atlas will finance the Cardinal 
transaction with about 60% equity and 40% debt. We apply our natural gas, NGL, 
and crude oil price deck to Atlas' unhedged volumes (24% in 2013, 60% in 2014) 
while assuming strong producer drilling in the partnership's liquids-rich 
plays leads to processing volumes of around 900 mmcf/d in 2013. Although 
current NGL prices are weak compared with earlier in the year, we believe 
infrastructure constraints in Atlas' core operating areas will lead to strong 
demand for existing capacity, promoting high utilization of the partnership's 
legacy and expansion assets. In addition, Atlas has hedged a significant 
portion of its 2013 gross margins, which provides some visibility for its 
near-term cash flow. Pro forma for Cardinal, we anticipate leverage (debt to 
EBITDA) will peak in the mid-4.0x area in the first half of 2013, before cash 
flow from organic growth projects comes on line and brings leverage to the 
low-4.0x area by year end. In addition, we expect 2013 EBITDA interest 
coverage to be about 4.0x and distribution coverage to be tight at about 1x in 
2013. 

Standard & Poor's rating on Atlas reflects the partnership's "weak" business 
risk profile and "significant" financial risk profile (as our criteria define 
the terms). Our assessment of Atlas' business risk profile takes into account 
its high degree of commodity price risk and limited geographic and asset 
diversity. We base the significant financial risk profile on the partnership's 
aggressive financial leverage and adequate liquidity position.

All of Atlas' EBITDA comes from its gathering and processing assets in the 
highly competitive Mid-Continent region. It recently brought two new 
processing facilities on line, but EBITDA growth from these units was somewhat 
limited due to constraints for NGL transportation and standard ramp-up 
considerations. We believe incremental NGL take-away capacity and access to 
pricing at the Mt. Belvieu, Texas hub will improve cash flow in 2013. Apart 
from Cardinal, we expect producer drilling to continue to be robust on Atlas' 
Velma system in the liquids-rich Woodford Shale and on its Midkiff/Benedum 
system in the Permian Basin, which includes long-term acreage dedications with 
producer and partner Pioneer Natural Resources Co. (BBB-/Stable/--).

Liquidity
We consider Atlas Pipeline's liquidity to be "adequate" under our criteria, 
with a ratio of liquidity sources over uses of about 1.3x during the next 12 
months. Pro forma for the Cardinal acquisition, we expect Atlas' primary 
sources of cash over the next 12 months to be $220 million of funds from 
operations and $200 million of availability under its $600 million revolving 
credit facility. Key uses include assumed maintenance and committed growth 
capital of $130 million and distributions between $170 million and $200 
million. While Atlas maintains a substantial hedge position, collateral 
postings are limited because the partnership generally enters into 
transactions with its bank group, and mark-to-market exposure is secured pari 
passu with direct borrowings. Annual maintenance capital spending is only 
about $25 million, which enables the partnership to scale down growth 
spending, if necessary. The partnership has no near-term debt maturities.

Atlas was in compliance with its bank covenants as of Sept. 30, 2012, and we 
expect it to remain in compliance for 2013. The credit agreement includes a 
maximum leverage ratio (total debt to adjusted EBITDA) of 5x, a maximum senior 
secured leverage ratio of 3x, and a minimum interest coverage test (EBITDA to 
interest expense) of 2.5x.

Recovery analysis
The unsecured rating is 'B+' (equal to the corporate credit rating), and the 
recovery rating is '3'. (For the complete analysis, see the recovery report to 
be published on RatingsDirect following this publication.

Outlook
The stable outlook reflects our view that Atlas will maintain adequate 
liquidity and financial leverage in the 4.0x-4.5x range, while successfully 
executing its 2013 expansion plans. A higher rating is possible if Atlas 
achieves financial leverage of 3.5x or less as the partnership builds out its 
processing facilities and associated gathering lines. We could lower the 
rating if a debt-financed acquisition or weak commodity prices cause debt to 
EBITDA to remain above 4.75x for a sustained period or liquidity becomes 
constrained.

Related Criteria And Research
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, 
April 18, 2012

Ratings List
Rating Affirmed

Atlas Pipeline Partners L.P.
 Corporate Credit Rating                B+/Stable/--       

Rating Raised
                                        To                 From
Atlas Pipeline Partners L.P.
 Senior Unsecured                       B+                 B
   Recovery Rating                      3                  5

Atlas Pipeline Finance Corp
 Senior Unsecured                       B+                 B
   Recovery Rating                      3                  5


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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