-- 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
-- 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.
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.
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
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
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/--).
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.
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.
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
Related Criteria And Research
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry,
April 18, 2012
Atlas Pipeline Partners L.P.
Corporate Credit Rating B+/Stable/--
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