TEXT-S&P rates MarkWest, MarkWest Finance notes 'BB'

Mon Jan 7, 2013 1:42pm EST

Related Topics

Overview
     -- U.S. midstream energy partnership MarkWest Energy Partners L.P. 
(MarkWest) and MarkWest Energy Finance Corp. (MarkWest Finance) are co-issuing 
$1 billion of senior unsecured notes due 2023 to redeem a portion of the 
partnership's unsecured debt and finance its 2013 capital spending program and 
for general corporate purposes.
     -- We are affirming our 'BB' corporate credit rating on MarkWest and 
assigning a 'BB' issue rating and a recovery rating of '4' to the proposed 
notes.
     -- The stable outlook reflects our view that MarkWest will maintain 
adequate liquidity, successfully execute its large organic growth plans in 
2013, and achieve financial leverage in the mid-4x area.

Rating Action
On Jan. 7, 2013, Standard & Poor's Ratings Services affirmed its 'BB' 
corporate credit rating on Denver-based MarkWest Energy Partners L.P. The 
outlook is stable. At the same time, we assigned our 'BB' issue rating and '4' 
recovery rating to MarkWest's and MarkWest Finance's proposed $1 billion 
unsecured notes offering due 2023, indicating that creditors can expect 
average (30% to 50%) recovery in the event of a payment default. The 
partnership plans to use the net proceeds to redeem its 8.75% notes due 2018 
and a portion of its notes due 2021 and 2022, partly fund its 2013 capital 
spending program, and for general corporate purposes. As of Sept. 30, 2012, 
MarkWest had total balance sheet debt of about $2.5 billion.

Rationale
The ratings on MarkWest Energy Partners L.P. reflect a "fair" business risk 
profile characterized by its strong competitive position in the Marcellus 
Shale region, increasing scale and geographic diversity, and increasing 
fee-based cash flow. Our ratings also consider an "aggressive" financial risk 
profile characterized by forecasted elevated financial leverage in 2013, the 
partnership's commodity-price-sensitive contract mix, its limited asset 
diversity, and the risk that a decrease in drilling could affect throughput 
levels.

In our opinion, the partnership's growth in the Marcellus Shale and expansion 
into the Utica Shale strengthens its competitive position in the northeastern 
U.S. and will significantly expand the scale of its operations by the end of 
2014. We believe these factors partly offset our expectation for high 
financial leverage for most of 2013. We expect total adjusted debt to EBITDA 
in the high-4x area for most of 2013 and a ratio of about 4.6x at year-end. 
The elevated leverage ratio is driven by MarkWest's large capital spending 
program (assumed to be $1.6 billion--the midrange of the partnership's 2013 
guidance of $1.4 billion to $1.9 billion), which causes a significant cash 
flow deficit. Key assumptions in our projections include our natural gas 
liquid (NGL) price assumption of 96 cents per gallon, an NGL to crude price 
relationship of 50% (with crude at $80 per barrel), a 10% growth rate in 
gathering volumes, a 75% increase in processed volumes, and about 35% growth 
in fractionated NGL volumes. We have also assumed that distributable cash flow 
is at the lower end of the partnership's $500 million to $575 million guidance 
range, which would result in distribution coverage between 1.1x and 1.2x.

We believe the partnership will have adequate liquidity to fund its 2013 
organic growth initiatives. MarkWest plans to spend about 95% of its 2013 
capital budget on its Liberty segment in the Marcellus and Utica shales. Joint 
venture partner EMG will fund the first $500 million of capital spending to 
develop midstream infrastructure in the Utica Shale, which supports near-term 
credit quality, in our view. (MarkWest will fund 100% of the capital 
requirements thereafter until it achieves 70% ownership).

On the positive side, MarkWest's business profile should improve following the 
spending program. We expect fee-based cash flow to increase to about 60% of 
the consolidated operating margin in 2013 from 47% in 2012. Almost all of the 
MarkWest's growth projects are fee based. The partnership's 
percentage-of-proceeds and keep-whole contracts comprise its remaining 
operating margin, which expose it to significant commodity price risk. As 
such, the remaining cash flows are subject to the risk of decreasing NGL 
prices and a narrowing spread between NGLs and natural gas.

MarkWest's hedging program partly offsets this commodity price risk. In our 
opinion, MarkWest has improved its NGL hedging policy by using more direct 
product hedges rather than proxy hedges. We assume about 50% of its expected 
2013 and 2014 equity volumes are hedged using direct hedges (As of Sept. 30, 
2012, the partnership's equity volumes are hedged at 73% in 2013 and at about 
22% in 2014).

Liquidity
We consider MarkWest's liquidity "adequate" under our corporate criteria, with 
sources divided by uses of about 1.2x during the next 12 months, pro forma for 
the proposed notes offering and recent equity issuance. Pro forma for this 
notes offering, we assume liquidity sources of $850 million in cash, $715 
million in revolver availability (due to covenant limitations), and forecasted 
FFO of about $500 million. In liquidity uses, we assume maintenance and growth 
capital spending of $1.6 billion and distributions of about $440 million. 
There are no near-term maturities.

Potential out-of-the-money hedges should not affect the partnership's 
liquidity position, because MarkWest exclusively enters into contracts with 
lenders under its credit facility whose hedge positions are secured. In 
addition, the credit facility limits the partnership's ability to enter into 
transactions with parties that require margin calls.

MarkWest's $1.2 billion credit facility matures in September 2017. The 
partnership is in compliance with its bank covenants, and we expect it to 
remain so in 2013 under our base-case NGL price assumptions. In 2013, 
covenants have been amended, increasing the maximum total leverage (total debt 
to EBITDA) ratio to 5.5x from 5.25x and the EBITDA credit for material 
projects under construction to 20% of total EBITDA from 15%.  As of Sept. 30, 
2012, the partnership's total leverage was 4.3x, compared with a maximum level 
of 5.25x, with an EBITDA cushion of about 20%.

Recovery analysis
The rating on MarkWest's senior unsecured debt is 'BB'(the same as the 
corporate credit rating), and the recovery rating is '4', indicating our 
expectation that lenders would receive average (30% to 50%) recovery if a 
payment default were to occur. (For the complete recovery analysis, see the 
recovery report to be published following this article on RatingsDirect.)

Outlook
The stable outlook reflects our view that MarkWest will maintain adequate 
liquidity, successfully execute its large organic growth plans in 2013, and 
achieve financial leverage in the mid-4x area by year-end. Higher ratings are 
unlikely in the near term, but are possible over time as MarkWest executes its 
capital projects, meaningfully expands into new resources plays, continues to 
increase its fee-based cash flows, and keeps total debt to EBITDA in the 
mid-3x area. We could lower the rating if total adjusted debt to EBITDA is 
more than 4.75x at year-end 2013 or early 2014, which could occur due to cost 
overruns associated with the capital spending programs or a weak commodity 
price environment.

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Global Midstream Energy 
Industry, April 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011

Temporary contact numbers: Michael Grande 609-240-3731; Nora Pickens 
401-741-1665
Ratings List
New Rating

MarkWest Energy Partners L.P.
MarkWest Energy Finance Corp.
 Senior Unsecured
  US$1 bil sr nts due 02/15/2023        BB
   Recovery Rating                      4

Ratings Affirmed

MarkWest Energy Partners L.P.
 Corporate Credit Rating                BB/Stable/--
  Senior Unsecured                      BB
   Recovery Rating                      4

MarkWest Energy 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.
FILED UNDER: