Fitch Affirms Southern Union and Panhandle Eastern at 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Southern Union Company (SUG) and Panhandle Eastern Pipe Line Company, LP (PEPL) as follows:

Southern Union Company

--Issuer Default Rating (IDR) at 'BBB-';

--First mortgage bonds at 'BBB';

--Senior unsecured at 'BBB-';

--Junior subordinated at 'BB'.

Panhandle Eastern Pipe Line Company

--IDR at 'BBB-';

--Senior unsecured at 'BBB-';

The Rating Outlook for both issuers is Stable. The rating action affects $2.4 billion of rated long-term debt. Following redemption of the preferred securities in July, those ratings have been withdrawn.

Key drivers of SUG's ratings are the stable performance of the company's regulated businesses which include significant Federal Energy Regulatory Commission (FERC)-regulated pipeline transportation and storage assets, as well as, Missouri and Massachusetts regulated gas distribution businesses. SUG's pipeline assets include PEPL, Trunkline LNG (contractually supported by contracts with BG LNG Services), and an indirect 50% interest in Florida Gas Transmission (FGT). The ratings also consider the volatility associated with the gathering and processing business, which represents significant commodity risk, despite an active hedging program. While the performance of this business is expected to remain volatile, given the downward draft of gas prices, 2009 can be considered a 'stress' year, and further downside risk to prices or volumes is deemed unlikely. In addition, forecast realized natural gas prices are within the range of Fitch's published energy price deck. Despite the effects of this business line and the lag effect of significant regulated pipeline investments, financial metrics should remain within the range for a 'BBB-' rating, albeit on the weaker side.

While PEPL's standalone credit profile is supported by stable FERC-regulated pipeline operations, LNG facilities under long-term contracts, and the structural seniority of its debt obligations to those at SUG, its ratings reflect the clear linkage between the parent and subsidiary. In addition to PEPL's participation in SUG's cash management program and the importance of PEPL's future cash flows to SUG, the propensity to use inter-company notes to finance activities outside of PEPL reinforces this relationship. A reduction of inter-company borrowings may permit Fitch to evaluate the PEPL credit on more of a stand-alone basis, although this is not considered likely.

The Stable Outlook for both SUG and PEPL reflects the expectation that SUG's credit profile and operating characteristics are expected to improve in the near term as the $440 million Trunkline LNG Infrastructure Enhancement Project came online in 2010 and longer term once dividends from FGT are restored pending completion of its Phase 8 expansion project. Credit ratios have been and are expected to continue to be pressured by these projects although this will be moderating through 2010 and more meaningfully in 2011. The $2.4 billion expansion project at FGT is ongoing with the bulk of SUG's $200 million to $300 million equity contribution expected in the fourth quarter of 2010 and the first quarter of 2011. Dividends will continue to be trapped until the project is in service, currently expected in spring 2011. Operating Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) to interest is expected to improve to 3.3 times (x) in 2010 from 2.7x in 2009 while debt to EBITDA decreases to 4.6x from 5.4x. In its ratio calculations Fitch assigns 75% equity credit to SUG's $600 million junior subordinated notes. Ratios at PEPL are also expected to improve due to cash flows from the Trunkline LNG expansion with EBITDA interest coverage increasing to 4.5x in 2010 from just under 4x in 2009.

While positive rating action is considered unlikely given that the current ratings anticipate some strengthening of financial metrics following completion of the FGT Phase 8 expansion project, several factors could lead to negative rating action. The most likely driver of negative rating action would be event driven, such as a material change in business strategy, particularly one that increases the risk profile by reducing the proportion of regulated cash flows. Other factors that could lead to a negative rating action include significant additional funding to support expansion at FGT (beyond the range forecast by Fitch), an adverse change in regulatory environment in Missouri, Massachusetts, or at the Federal level, or inability to hedge midstream operations in continued depressed commodity price environment.

Headquartered in Houston, SUG is a diversified natural gas company with operations in the transportation, storage, gathering, processing and distribution of natural gas. Its businesses include Panhandle Energy, Southern Union Gas Services, Missouri Gas Energy, New England Gas Company, and its JV interest in Citrus, which owns Florida Gas Transmission LLC. Panhandle's operations include Panhandle Eastern Pipe Line, Trunkline LNG, Trunkline Gas Company, Sea Robin Pipeline, and Southwest Gas Storage. These businesses operate approximately 15,000 miles of interstate pipelines that transport natural gas from the Anadarko and San Juan Basins, the Rockies, the Gulf of Mexico, Mobile Bay and South Texas to major markets in the Southeast, Midwest and Great Lakes region, as well as one of North America's largest LNG import terminals. Southern Union Gas Services primarily consists midstream operations in the Permian basin in Texas and New Mexico, including 4,800 miles of pipeline. The gas local distribution companies (LDCs) serve more than half a million natural gas end-user customers in Missouri and Massachusetts.

The sources of information used to assess these ratings included information from the issuer, including financial statements and regulatory filings, as well as information compiled by Fitch in accordance with published criteria.

Additional information is available at www.fitchratings.com.

Applicable Criteria:

--'Corporate Rating Methodology' dated Aug. 16, 2010;

--'Credit Rating Guidelines for Regulated Utility Companies' dated July 31, 2007;

--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' dated Aug. 22, 2007;

--'Utilities Sector Notching and Recovery Ratings' dated March 16, 2010;

--'Equity Credit for Hybrids & Other Capital Securities' dated Dec. 29, 2009;

--'Rating Hybrid Securities' dated Dec. 29, 2009.

Related Research:

Equity Credit for Hybrids & Other Capital Securities - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112

Rating Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086

Credit Rating Guidelines for Regulated Utility Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Utilities Sector Notching and Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

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