NEW YORK--()--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 strategy;
--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 percent-of-proceeds arrangements;
--Reliance on drilling and production activities in the E&P sector for gathering and processing volumes, which in turn are ultimately driven by volatile hydrocarbon prices;
--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 material projects.
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 during 3Q'12.
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 in 2013.
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 perspective.
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 basis.
--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. 27, 2012;
--'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, 2012;
--'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 Growth)
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012 (Second-Quarter Review)
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
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