Overview -- U.S. midstream energy master limited partnership (MLP) Access Midstream Partners L.P. intends to purchase Chesapeake Midstream Operating LLC, a wholly owned subsidiary of Chesapeake Midstream Development LLC (CMD; not rated), for $2.16 billion. The CMD assets consist of natural gas gathering and processing operations in the Eagle Ford, Utica, Niobrara, Permian, Marcellus, and Haynesville regions. Simultaneous to the acquisition, The Williams Cos. Inc. intends to purchase 50% of Access' general partner and 25% of the limited partner units from Global Infrastructure Partners (GIP). -- In conjunction with the transaction, Access plans to issue $1.4 billion of senior unsecured notes due 2023. -- We are affirming our 'BB-' corporate credit rating and 'BB-' senior unsecured rating on Access. At the same time, we are revising our outlook to stable from negative. Also, we are assigning our 'BB-' and '4' recovery rating to Access' $1.4 billion proposed senior unsecured notes. -- The stable outlook reflects Access' increased scale and diversity following the acquisition of CMD, tempered by increased counterparty exposure to Chesapeake Energy Corp. (CHK). Rating Action On Dec. 12, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' corporate credit rating and 'BB-' senior unsecured rating on U.S. midstream energy partnership Access Midstream Partners L.P. At the same time, we revised our outlook to stable from negative. Also, we assigned our 'BB-' and '4' recovery rating to Access' $1.4 billion proposed senior unsecured notes coissued by ACMP Finance Corp. Access had $1.37 billion of debt as of Sept. 30, 2012. Rationale The stable outlook reflects Access' increased scale and diversity. The transaction adds meaningful resource potential to the partnership's operating footprint, while maintaining stable cash flows due to a 100% fixed-fee contract mix enhanced by "cost-of-service" features (essentially guarantees Access a fixed rate of return on capital spending). Pro forma for the transaction, Access' gross dedicated acreage increases by nearly 50% to 8.7 million acres and its geographic footprint expands to 10 basins. The fact that most of CMD's assets are favorably positioned in liquids-rich plays, in our view, improves Access' competitive position. Importantly, contracts in the Eagle Ford region, which account for more than 25% of the partnership's estimated 2013 EBITDA (80% of estimated 2013 CMD-related EBITDA), feature a fee-tier component that enhances cash flow stability by essentially locking in revenue for 2013 and 2014 across a very wide band of volumes. We expect CMD's dry gas plays to contribute less than 5% of estimated 2013 EBITDA. Of note, in contrast to Access' previous acquisitions, the CMD assets are undeveloped and require meaningful capital investment over the next two years before volumes ramp up to projected levels. While this presents some execution risk, we believe CMD complements Access' core competencies and the successful build out of infrastructure is reasonably achievable. In our view, the primary risk to cash flow relates to the counterparty exposure to CHK. As CHK represents 70% to 75% of Access' EBITDA over the coming years, we believe it could try to exert pressure on Access to renegotiate contract terms in a distressed scenario. In a more extreme case, a CHK bankruptcy would present substantial uncertainty to Access' business. Any potential buyers would need to use the Access assets to bring the hydrocarbons to basin, but could seek to renegotiate fees. Because Access generally makes a low-teens rate of return on its investments, we believe that the contracts would likely be considered reasonable. However, rates on gathering lines are highly site-specific and generally not publicly available with any level of granularity. We consider Access' financial risk profile as "aggressive," as defined by our criteria. We expect GIP and Williams will continue to manage Access conservatively by maintaining adequate liquidity and a pro forma debt to EBITDA ratio between 3.5x and 4.5x. In our base case projections, we assume that Access will finance the CMD transaction with about 55% equity and 45% debt. We project cash flow from the acquired assets located in the Eagle Ford and Haynesville regions equates to the minimum amount stipulated by the contracts. For the remaining regions that do not have similar guarantees, we apply a modest haircut to gathering volumes, in the 5% to 7% range, compared with management's assumptions. In terms of Access' existing assets, we assume volumes will increase modestly in the Mid-Continent region while cash flow from the Barnett, Haynesville, and Marcellus shales equates to the minimum amount by their respective agreements. As a result, we project leverage to peak in early 2013 and decrease modestly by the end of the year to between 4.0x and 4.5x as cash flow gradually increases. In terms of other financial measures, we forecast EBITDA to interest of around 5.0x and distribution coverage of 1.2x. We consider Access' business risk profile as "fair." Access' legacy operations reside in the Marcellus Shale, Barnett Shale, Haynesville Shale, and Mid-Continent regions. All of the partnership's contracts are fee-based, and, even as Access expands its operations, we do not expect it to incur material direct exposure to commodity price fluctuations. The Marcellus assets have 15-year, fixed-fee contracts with several exploration and production companies with a weighted-average rating of 'BBB'. CHK's commitment to generate minimum EBITDA levels, $100 million in 2012 and $150 million in 2013, for Access' benefit provides clear cash flow visibility. Most of Access' remaining assets are in the Barnett Shale, and some are in the Haynesville Shale and Mid-Continent regions. Access has executed minimum-volume contracts with CHK and with Total S.A. (AA-/Stable/A-1+), Access' 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 fee redetermination, add stability to projected revenues and provide a base level of cash flow available for debt service. Liquidity Pro forma for the CMD transaction, we assess Access' liquidity as "adequate," with sources exceeding uses by about 1.3x during the next 12 months. In our calculation, primary sources of liquidity include about $600 million in funds from operations and $900 million available under Access' $1 billion senior secured revolving credit facility due in 2016. We assume Access' primary uses of cash for the next 12 months will consist of maintenance and committed growth capital spending of about $800 million and distributions to unitholders in the $330 million to $350 million range. These calculations do not reflect any further acquisitions, which we believe are likely to continue and would prompt us to regularly reassess the liquidity calculations throughout the year. Financial covenants on the revolving credit facility call for minimum interest coverage of 2.5x and maximum total leverage of 5.0x. We expect Access to be in compliance with these covenant tests in 2013. Recovery analysis Access' 'BB-' senior unsecured rating and '4' recovery rating reflect our expectations that lenders would receive average (30% to 50%) recovery of principal if a default occurs. (For the complete recovery analysis, please see the recovery report to be published soon after this report on RatingsDirect.) Outlook The outlook on the ratings is stable. Because of Access' significant customer concentration with CHK, any changes to CHK's ratings would cause us to reevaluate our ratings on Access. Independent of any potential ratings actions on CHK, we could lower our ratings on Access if the partnership materially increases leverage such that debt to EBITDA exceeds 4.75x on a sustained basis or if the company begins to assume more significant commodity price risk. We could raise the ratings on Access if the partnership achieves greater customer diversification while maintaining debt to EBITDA below 4.0x. Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List Ratings Affirmed; Outlook Revised To From Access Midstream Partners L.P. Corp credit rating BB-/Stable/-- BB-/Negative/-- Senior unsecured BB- Recovery rating 4 New Rating $1.4 bil senior unsecured notes* 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.
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