Jan 7 - Fitch Ratings assigns MarkWest Energy Partners, L.P.'s
(MarkWest) proposed issuance of $1 billion senior unsecured notes due 2023 'BB'.
The notes are to be co-issued by MarkWest and MarkWest Energy Finance
Corporation (a wholly owned subsidiary). The new notes are to rank pari passu
with the company's senior unsecured debt.
MarkWest plans to use proceeds to redeem $81 million 8.75% notes due 2018, $175
million 6.5% notes due 2021, and $245 million of 6.25% notes due 2022. The
remaining proceeds are to be used to fund capital expenditures, working capital
and for general partnership purposes.
Fitch currently rates MarkWest as follows:
--Long-term Issuer Default Rating (IDR) 'BB';
--Senior unsecured revolving credit facility 'BB+';
--Senior unsecured debt 'BB'.
MarkWest's Rating Outlook is Stable.
KEY RATING DRIVERS
Key rating factors which support the rating include:
--A modestly diverse footprint with leading positions in the liquids-rich areas
in the Mid-continent and Appalachia;
--Strategically well-positioned assets with exposure to the rapidly growing
Marcellus and Utica shale plays;
--An increasing amount of fee-based revenue sources and a layered hedging
--A strategy to fund growth with a balanced combination of debt and equity.
The ratings also factor in the following concerns:
--Increased leverage which should decrease over the next few quarters;
--A still-significant percentage of non-fee-based cash flows from keep-whole and
--Reliance on drilling and production activities in the E&P sector for gathering
and processing volumes, which in turn are ultimately driven by volatile
--A capital expenditure program which has been growing significantly;
--Use of a proxy hedging that can be periodically affected by breakdowns in the
correlation between crude oil and natural gas liquids (NGL) prices.
Amendment: In December 2012, MarkWest's secured revolving credit agreement was
amended to increase the financial covenant for the total leverage ratio (as
defined by the bank agreement) to 5.5x from 5.25x through the fourth quarter of
2013 (4Q'13). After then, the total leverage ratio cannot exceed 5.25x. The bank
definition of total leverage differs from the Fitch calculation and the largest
difference is that the bank definition gives pro forma EBITDA credit for
Leverage: At the end of 3Q'12, debt to adjusted leverage (defined by Fitch as
debt to adjusted EBITDA) was 5.0x, which was substantially above 4.1x at the end
of 2011. The reason for the higher leverage was the $750 million of notes issued
With the issuance of new notes, leverage will be elevated over the next few
quarters to fund growth projects in two important shale plays, the Marcellus and
Utica. Fitch anticipates that leverage should remain around 5.0x at end of 2012
and slightly below that at the end of 2013. Fitch expects significant EBITDA
expansion in 2014 which should enable leverage to fall in the range of 4.0x to
4.5x depending on the funding of capex.
Adequate Liquidity: At the end of 3Q'12, MarkWest had $1.6 billion of liquidity
which consisted of $415 million of cash and nearly $1.2 million available on its
revolving bank facility which extends until 2017.
Fitch considers the current revolver's size and the company's financial
flexibility to be adequate to meet MarkWest's liquidity needs. The next debt
maturity is scheduled for 2020 after the 2018's are redeemed.
Capital Expenditures: The company has been spending significantly to fund growth
projects. The company expects 2012 capex to be approximately $1.8 billion which
excludes the Keystone acquisition for $510 million in 3Q'12 net of The Energy
Minerals Group's (EMG) contribution. In 2013, MarkWest expects spending to be in
the range of $1.4 billion to $1.9 billion.
While MarkWest's spending has been significant, the company has used a
combination of debt and equity to fund growth. In 2012, net equity proceeds were
$1.6 billion while new debt issued was just $750 million.
Distributable Cash Flow and Coverage: Distributable cash flow (DCF) for the
latest 12 months (LTM) ending 3Q'12 was $393 million, an increase from $333
million in 2011. The company expects it to grow to $500 million to $575 million
The distribution coverage for the LTM ending 3Q'12 was healthy at 1.2x, which
was unchanged from the end of 2011. As of July 1, 2013, 20% of the 19.95 million
Class B units held by EMG will begin to vest (the vesting schedule is 20% per
year beginning in 2013) so the coverage ratio may slightly decline but Fitch
does not anticipate any material changes.
Hedging: The company uses some direct product hedges as well as a proxy hedging
strategy which is vulnerable to a periodic breakdown in the correlation between
crude oil and NGLs. At the end of 3Q'12, 67% of its expected volumes were hedged
for 2012, approximately 73% for 2013, and 22% for 2014. At the end of 3Q'12,
about 35% of its hedges for 2014 were direct product hedges.
Fee-Based Contracts: For the first nine months of 2012, 47% of net operating
margin was from fee-based contracts and MarkWest projects this will increase to
more than 60% by the end of 2013 and almost 70% by the end of 2014. Fitch
considers the increase of fee based contracts favorable from a credit
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Increased size, scale, and earnings diversification matched with a sustained
decrease in leverage to approximately 3.5x.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Leverage (defined as debt to adjusted EBITDA) in excess of 5.0x on a sustained
--Higher leverage either for high multiple acquisitions or to fund growth
projects above and beyond planned debt increases.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 8, 2012;
--'2013 Outlook: North American Oil & Gas' Dec. 13, 2012
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012;
--'Eagle Ford Shale Report: Midstream and Pipeline Sector Economics Driving
Growth' Oct. 15, 2012;
--'Pipelines, Midstream, and MLP Stats Quarterly - Second Quarter 2012' Sept.
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' July 10, 2012;
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' May 22,
--'Master Limited Partnerships 101' Nov. 1, 2011;
--'Natural Gas Pipelines: Hot Topics' Oct. 13, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
2013 Outlook: North American Oil & Gas
2013 Outlook: Natural Gas Pipelines & MLPs
2013 Outlook: Midstream Services and MLPs
Eagle Ford Shale Report (Midstream and Pipeline Sector - Economics Driving
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012
Marcellus Shale Report: Midstream and Pipeline Sector --
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Master Limited Partnerships 101
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk