TEXT-S&P affirms Access Midstream ratings; outlook now stable

Wed Dec 12, 2012 9:38am EST

Overview
     -- U.S. midstream energy master limited partnership (MLP) Access 
Midstream Partners L.P. intends to purchase Chesapeake Midstream
Operating LLC, a wholly owned subsidiary of Chesapeake Midstream Development LLC
(CMD; not rated), for $2.16 billion. The CMD assets consist of natural gas
gathering and processing operations in the Eagle Ford, Utica, Niobrara, Permian,
Marcellus, and Haynesville regions. Simultaneous to the acquisition, The 
Williams Cos. Inc. intends to purchase 50% of Access' general partner and 25% 
of the limited partner units from Global Infrastructure Partners (GIP).   
     -- In conjunction with the transaction, Access plans to issue $1.4 
billion of senior unsecured notes due 2023. 
     -- We are affirming our 'BB-' corporate credit rating and 'BB-' senior 
unsecured rating on Access. At the same time, we are revising our outlook to 
stable from negative. Also, we are assigning our 'BB-' and '4' recovery rating 
to Access' $1.4 billion proposed senior unsecured notes.
     -- The stable outlook reflects Access' increased scale and diversity 
following the acquisition of CMD, tempered by increased counterparty exposure 
to Chesapeake Energy Corp. (CHK). 

Rating Action
On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 
corporate credit rating and 'BB-' senior unsecured rating on U.S. midstream 
energy partnership Access Midstream Partners L.P. At the same time, we revised 
our outlook to stable from negative. Also, we assigned our 'BB-' and '4' 
recovery rating to Access' $1.4 billion proposed senior unsecured notes 
coissued by ACMP Finance Corp. Access had $1.37 billion of debt as of Sept. 
30, 2012.



Rationale
The stable outlook reflects Access' increased scale and diversity. The 
transaction adds meaningful resource potential to the partnership's operating 
footprint, while maintaining stable cash flows due to a 100% fixed-fee 
contract mix enhanced by "cost-of-service" features (essentially guarantees 
Access a fixed rate of return on capital spending). Pro forma for the 
transaction, Access' gross dedicated acreage increases by nearly 50% to 8.7 
million acres and its geographic footprint expands to 10 basins. The fact that 
most of CMD's assets are favorably positioned in liquids-rich plays, in our 
view, improves Access' competitive position. Importantly, contracts in the 
Eagle Ford region, which account for more than 25% of the partnership's 
estimated 2013 EBITDA (80% of estimated 2013 CMD-related EBITDA), feature a 
fee-tier component that enhances cash flow stability by essentially locking in 
revenue for 2013 and 2014 across a very wide band of volumes. We expect CMD's 
dry gas plays to contribute less than 5% of estimated 2013 EBITDA. Of note, in 
contrast to Access' previous acquisitions, the CMD assets are undeveloped and 
require meaningful capital investment over the next two years before volumes 
ramp up to projected levels. While this presents some execution risk, we 
believe CMD complements Access' core competencies and the successful build out 
of infrastructure is reasonably achievable.   

In our view, the primary risk to cash flow relates to the counterparty 
exposure to CHK. As CHK represents 70% to 75% of Access' EBITDA over the 
coming years, we believe it could try to exert pressure on Access to 
renegotiate contract terms in a distressed scenario. In a more extreme case, a 
CHK bankruptcy would present substantial uncertainty to Access' business. Any 
potential buyers would need to use the Access assets to bring the hydrocarbons 
to basin, but could seek to renegotiate fees. Because Access generally makes a 
low-teens rate of return on its investments, we believe that the contracts 
would likely be considered reasonable. However, rates on gathering lines are 
highly site-specific and generally not publicly available with any level of 
granularity.  

We consider Access' financial risk profile as "aggressive," as defined by our 
criteria. We expect GIP and Williams will continue to manage Access 
conservatively by maintaining adequate liquidity and a pro forma debt to 
EBITDA ratio between 3.5x and 4.5x. In our base case projections, we assume 
that Access will finance the CMD transaction with about 55% equity and 45% 
debt. We project cash flow from the acquired assets located in the Eagle Ford 
and Haynesville regions equates to the minimum amount stipulated by the 
contracts. For the remaining regions that do not have similar guarantees, we 
apply a modest haircut to gathering volumes, in the 5% to 7% range, compared 
with management's assumptions. In terms of Access' existing assets, we assume 
volumes will increase modestly in the Mid-Continent region while cash flow 
from the Barnett, Haynesville, and Marcellus shales equates to the minimum 
amount by their respective agreements. As a result, we project leverage to 
peak in early 2013 and decrease modestly by the end of the year to between 
4.0x and 4.5x as cash flow gradually increases. In terms of other financial 
measures, we forecast EBITDA to interest of around 5.0x and distribution 
coverage of 1.2x.  

We consider Access' business risk profile as "fair." Access' legacy operations 
reside in the Marcellus Shale, Barnett Shale, Haynesville Shale, and 
Mid-Continent regions. All of the partnership's contracts are fee-based, and, 
even as Access expands its operations, we do not expect it to incur material 
direct exposure to commodity price fluctuations. The Marcellus assets have 
15-year, fixed-fee contracts with several exploration and production companies 
with a weighted-average rating of 'BBB'. CHK's commitment to generate minimum 
EBITDA levels, $100 million in 2012 and $150 million in 2013, for Access' 
benefit provides clear cash flow visibility.  

Most of Access' remaining assets are in the Barnett Shale, and some are in the 
Haynesville Shale and Mid-Continent regions. Access has executed 
minimum-volume contracts with CHK and with Total S.A. (AA-/Stable/A-1+), 
Access' 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 fee redetermination, add stability to projected 
revenues and provide a base level of cash flow available for debt service.

Liquidity
Pro forma for the CMD transaction, we assess Access' liquidity as "adequate," 
with sources exceeding uses by about 1.3x during the next 12 months. In our 
calculation, primary sources of liquidity include about $600 million in funds 
from operations and $900 million available under Access' $1 billion senior 
secured revolving credit facility due in 2016. We assume Access' primary uses 
of cash for the next 12 months will consist of maintenance and committed 
growth capital spending of about $800 million and distributions to unitholders 
in the $330 million to $350 million range. These calculations do not reflect 
any further acquisitions, which we believe are likely to continue and would 
prompt us to regularly reassess the liquidity calculations throughout the year.

Financial covenants on the revolving credit facility call for minimum interest 
coverage of 2.5x and maximum total leverage of 5.0x. We expect Access to be in 
compliance with these covenant tests in 2013.

Recovery analysis
Access' 'BB-' senior unsecured rating and '4' recovery rating reflect our 
expectations that lenders would receive average (30% to 50%) recovery of 
principal if a default occurs. (For the complete recovery analysis, please see 
the recovery report to be published soon after this report on RatingsDirect.)

Outlook
The outlook on the ratings is stable. Because of Access' significant customer 
concentration with CHK, any changes to CHK's ratings would cause us to 
reevaluate our ratings on Access. Independent of any potential ratings actions 
on CHK, we could lower our ratings on Access if the partnership materially 
increases leverage such that debt to EBITDA exceeds 4.75x on a sustained basis 
or if the company begins to assume more significant commodity price risk. We 
could raise the ratings on Access if the partnership achieves greater customer 
diversification while maintaining debt to EBITDA below 4.0x.  

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

Ratings List
Ratings Affirmed; Outlook Revised
                               To              From
Access Midstream Partners L.P.
Corp credit rating             BB-/Stable/--   BB-/Negative/--
Senior unsecured               BB-
Recovery rating                4

New Rating
$1.4 bil senior unsecured notes*      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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