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