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