June 8 - Overview
-- U.S. midstream energy company Chesapeake Midstream Partners L.P.
(CHKM) announced that Global Infrastructure Partners (GIP; unrated) has
agreed to acquire all of Chesapeake Energy Corp.'s (CHK) ownership interest in
CHKM for $2.0 billion.
-- As a result of the acquisition, GIP will own 100% of CHKM's general
partner (GP) interest and 69% of CHKM's limited partner units.
-- We are affirming our 'BB-' corporate credit rating on CHKM.
-- The negative outlook reflects our uncertainty about CHKM's strategic
direction given the pending sale of its GP and limited partnership interests
to GIP, a private-equity firm.
On June 8, 2012, Standard & Poor's Ratings Services affirmed its 'BB-'
corporate credit rating on U.S. midstream energy company Chesapeake Midstream
Partners L.P. (CHKM). The outlook is negative. As of March 31, 2012, CHKM had
total balance sheet debt of $1.19 billion.
The ratings affirmation reflects Global Infrastructure Partners (GIP; unrated)
agreement to acquire all of Chesapeake Energy Corp.'s (CHK) ownership interest
in CHKM for $2 billion. As a result of the acquisition, GIP will own 100% of
CHKM's general partner interest and 69% of CHKM's limited partner units.
The ratings on CHKM reflect a "fair" business risk profile and an
"intermediate" financial risk profile under our criteria. The partnership's
fair business risk profile reflects its stable cash flow generated from an
entirely fee-based contract mix supported by long-term minimum volume
commitments and fee redeterminations. Limited customer and geographic
diversity partially offset these strengths. The partnership's intermediate
financial risk profile reflects low financial leverage and a master limited
partnership (MLP) structure that gives CHKM a strong incentive to pay out to
unitholders most of its cash flow after maintenance capital spending each
Concerns related to CHK's ownership and related control through their GP
interest to date had weighed on CHKM's rating and ultimately resulted in our
capping it to our rating on Chesapeake Energy. With the sale of the general
and limited partnership interests to GIP, a $10 billion private-equity fund
with a focus on infrastructure investments), some of our concerns regarding
Chesapeake Energy's control over CHKM have been alleviated. However, CHKM's
operational dependence on Chesapeake Energy remains high. Chesapeake Energy is
by far CHKM's most significant customer, responsible for roughly 75% of 2012
estimated revenues. Further, we believe acquisitions dependant upon Chesapeake
Energy's drilling program will continue to influence CHKM's growth strategy,
though we acknowledge that the ownership change may accelerate the
partnership's cash flow diversification through a renewed focus on organic
projects and/or third-party acquisitions.
Nonetheless, we believe a bankruptcy at Chesapeake Energy would be, at a
minimum, highly disruptive to CHKM. While we believe that natural gas will
likely continue to flow through CHKM's lines, we have limited visibility into
whether the contracted rates between Chesapeake and CHKM remain at market
rates, particularly in today's low natural gas price environment. Rates on
gathering lines are highly site-specific and generally not publicly available
on any level of granularity. As a result, Chesapeake Energy's creditworthiness
continues to influence our rating on CHKM.
We consider CHKM's financial risk profile intermediate. We expect GIP will
continue to manage CHKM in a conservative manner by maintaining adequate
liquidity and a pro forma debt to EBITDA ratio between 2.5x-3.5x. Under our
base-case model, we assume Mid-Continent volumes are marginally stronger than
2011 volumes, and cash flow from the Barnett, Haynesville, and Marcellus
regions equates to the minimum amount guaranteed by the minimum volume
contracts. As a result, we expect the partnership to have debt to EBITDA of
3.5x to 4.0x, EBITDA to interest coverage of about 7.0x, and distribution
coverage of 1.2x in 2012. We also expect long-term debt to remain at about
3.5x as CHKM continues to access the capital markets to fund growth projects.
The partnership recently acquired Marcellus Shale midstream assets from a
wholly owned subsidiary of Chesapeake Energy for $865 million. The Marcellus
assets have 15-year, fixed-fee contracts with several exploration and
production companies with a weighted-average rating of 'BBB'. Chesapeake
Energy's commitment to generate minimum EBITDA levels in 2012 and 2013 for
CHKM's benefit provides clear cash flow visibility during the next 24 months.
In addition to the Marcellus region, most of CHKM's assets are in the Barnett
Shale, and some are in the Haynesville Shale and Mid-Continent regions. All of
the partnership's contracts are fee-based, and, even as CHKM expands its
operations, we do not expect it to incur material direct exposure to commodity
price fluctuations. In addition, CHKM has executed minimum-volume contracts
with Chesapeake Energy and with Total S.A. (AA-/Stable/A-1+), CHKM's
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 the fees to be redetermined regularly, add stability to
projected revenues and provide a base level of cash flow available for debt
We assess CHKM's liquidity as "adequate," with sources exceeding uses by about
1.2x during the next 12 months. In our calculation, primary sources of
liquidity include about $350 million in funds from operations and $400 million
available under CHKM's $1 billion senior secured revolving credit facility due
in 2016. We assume CHKM's primary uses of cash for the next 12 months will
consist of maintenance and growth capital spending of about $400 million and
distributions to unitholders of $250 million. These calculations do not
reflect any further acquisitions, which we believe are likely to continue and
would prompt us to reassess the liquidity calculations on a regular basis
throughout the year.
Financial covenants on the revolving facility call for minimum interest
coverage of 2.5x and maximum total leverage of 5.0x. We expect CHKM to be in
compliance with these covenant tests for the remainder of the year.
The rating on the $350 million and $750 million senior unsecured credit
facilities is 'BB-' (the same as the corporate credit rating), and the
recovery rating is '4', which reflects our expectations that lenders would
receive average (30% to 50%) recovery of principal in the event of a default.
The negative rating outlook takes into account our uncertainty about CHKM's
strategic direction given the pending sale of its general partnership and
limited partnership interests to private-equity firm GIP. Independent of any
potential ratings actions on Chesapeake Energy, we could lower the rating if
CHKM heightens its volume and cash flow risk by purchasing undeveloped assets
that require significant capital investment, increases its commodity price
exposure, or participates in a leveraging acquisition, such that debt to
EBITDA exceeds 4.5x for an extended period of time.
Furthermore, our ratings on Chesapeake Energy can influence our ratings on
CHKM because of the business ties between the two entities. We could revise
the outlook to stable if we gain incremental comfort around CHKM's strategic
focus, given the ownership change. Specifically, greater customer
diversification, a measured growth strategy, and the pursuit of financial
policies such that debt to EBITDA remains below 4x could prompt an outlook
Related Criteria And Research
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry,
April 18, 2012
Chesapeake Midstream Partners L.P.
Corporate Credit Rating BB-/Negative/--
Chesapeake Midstream Partners L.P.
Senior Unsecured BB-
Recovery Rating 4
CHKM 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