Fitch Affirms Energy Transfer Partners; Places Energy Transfer Equity on Watch Positive
by Business Wire
Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) for Energy Transfer Partners, L.P. (ETP) and its affiliates, Sunoco, Inc. (SUN), Southern Union Co. (SUG), and Panhandle Eastern Pipeline Co. LP (PEPL) at 'BBB-'. ETP's Rating Outlook is revised to Stable from Negative. In addition, Energy Transfer Equity, L.P.'s (ETE) IDR was placed on Rating Watch Positive.
Approximately $12.8 billion of outstanding long-term debt is affected by today's action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Increased scale and diversity: Recently completed merger transactions and pending asset sales will result in a larger, more diversified, and generally financially stronger family of Energy Transfer companies. On a consolidated basis the percentage of contractually supported fee-based margins increases. For ETP and SUG, commodity price exposure is reduced. At ETE, it is expected that a portion of the pending asset sale proceeds will be used to reduce outstanding debt, improving its standalone parent company leverage metrics.
Summary of completed transactions: In October 2012, ETP merged with SUN and contributed to ETP the 2% general partner (GP) interest, incentive distribution rights, and 32.4% limited partner (LP) interest in Sunoco Logistics Partners, L.P. (SXL; IDR 'BBB', Stable Outlook). Additionally, immediately following the merger, ETE, owner of ETP's GP, contributed its interest in SUG to ETP HoldCo Corporation (ETP Holdco) in exchange for a 60% equity interest in ETP Holdco. In conjunction with ETE's contribution, ETP contributed its interest in SUN to ETP Holdco and retained a 40% equity interest in ETP Holdco. Pursuant to a shareholder agreement between ETP and ETE, ETP controls ETP Holdco. SUN and SXL add crude oil, refined products, and retail operations. SUG provides stable interstate pipelines. Also, in January 2012 ETP sold its propane operations which reduced its sensitivity to weather and commodity prices.
Pending asset sales: In December 2012, SUG entered into an agreement to sell its gas utility operations for $1.015 billion of cash and $20 million of assumed debt in a transaction expected to close by the end of the third quarter of 2013. In February 2013, SUG entered into an agreement to contribute its natural gas midstream operations to Regency Energy Partners LP (RGP) for $1.5 billion comprising $900 million of RGP units and $600 million of cash. The cash proceeds from the transactions are expected to be used to reduce debt at SUG, PEPL, and ETE.
Leverage reduced at ETE: Fitch expects that a portion of the cash proceeds from the transactions will be used to reduce debt at ETE and that its adjusted debt-to-EBITDA, which measures ETE parent company debt against the distributions it receives from its affiliates, will drop below 3.0x in 2013. ETP's pro forma consolidated debt-to-EBITDA should end 2013 at approximately 4.2x, which is down from 4.6x in 2012. ETP is ramping down its aggressive capital expansion program with many projects coming on line in late 2012 and 2013, strengthening its cash flow. Also considered are ETP's structural subordination to approximately $6.9 billion of subsidiary debt and the uncertainties resulting from ongoing structural and operational changes and potential future structural changes as management attempts to simplify the organization.
Fitch expects ETP management to manage credit metrics at SUG and PEPL at levels to maintain their current ratings, although the amount of de-leveraging at these entities resulting from 2013 asset sales has not been determined. However, Fitch expects SUG's consolidated leverage be maintained in the 4.0x to 4.5x range. ETP is co-obligor on SUN's outstanding notes and, as a result, its rating equates to ETP's.
Liquidity is adequate: ETP has access to a $2.5 billion unsecured revolving credit facility that matures on Oct. 27, 2016. At Feb. 5, 2013, approximately $500 million of borrowings and letters of credit were outstanding under the revolver. The revolver has one financial covenant, a maximum leverage test of 5.0x (5.5x following acquisitions of $100 million or more). At Dec. 31, 2012, ETP's revolver leverage ratio, which includes a material projects adjustment, was 4.72x. ETE has a $200 million secured credit facility that matures on June 15, 2015. At Dec. 31, 2012, $60 million was outstanding. SUG has a $700 million unsecured credit facility that matures on May 16, 2015. At Dec. 31, 2012, $210 million was outstanding under the revolver. SUN's revolver was terminated in 2012.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Parent company debt to EBITDA maintained below 3.0x;
--An improving credit profile at ETP, the primary provider of cash for ETE.
ETP and SUN
--A material improvement in credit metrics with ETP leverage sustained at between 3.5x and 4.0x;
--A lessening of consolidated company business risk as ETP acquires and expands pipeline and fixed-fee operations.
SUG and PEPL
--Improving credit metrics with leverage sustained at 3.25x to 3.75x;
--Improving credit profile at ETP.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability to lower leverage as anticipated;
--Weakening credit profile at ETP.
ETP and SUN
--Weakening credit metrics with ETP consolidated leverage above 5.0x;
--Increasing commodity exposure.
SUG and PEPL
--Weakening credit metrics with leverage above 5.0x;
--Downgrade at ETP.
The following ratings have been affirmed by Fitch with a Stable Outlook:
Energy Transfer Partners, L.P.
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Southern Union Company
--IDR at 'BBB-';
--First Mortgage Bonds at 'BBB';
--Senior unsecured debt at 'BBB-';
--Junior subordinate at 'BB'.
Panhandle Eastern Pipeline Company, LP
--IDR at 'BBB-';
--Senior unsecured at 'BBB-'.
Fitch also affirmed:
Sunoco, Inc. (Energy Transfer Partners, L.P. is co-obligor on Sunoco, Inc. debt, which is listed under Energy Transfer Partners, L. P. on the Fitch web site)
--Senior unsecured notes at 'BBB-'.
The following ratings were placed on Rating Watch Positive:
Energy Transfer Equity, L.P.
--Secured senior notes 'BB';
--Secured term loan 'BB';
--Secured revolving credit facility 'BB'.
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: 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' September 27, 2012;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities' June 10, 2012;
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' May 1, 2012;
--'Master Limited Partnerships 101' Nov. 1, 2011.
Applicable Criteria and Related Research
2013 Outlook: Midstream Services and MLPs
2013 Outlook: Natural Gas Pipelines & MLPs
Corporate Rating Methodology
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Pipelines, Midstream, and MLP Stats Quarterly ￢ﾀﾔThird-Quarter 2012
Eagle Ford Shale Report (Midstream and Pipeline Sector ￢ﾀﾔ Economics Driving Growth)