NEW YORK--()--Fitch Ratings has assigned a 'BB' rating to Regency Energy Partners L.P.'s (RGP) proposed $500 million senior notes offering due 2023 (senior notes). Proceeds will be used to repay borrowings under RGP's credit facility. A full list of RGP's ratings appears at the end of this release. The Rating Outlook is Stable.
RGP's ratings reflect the fixed fee nature of its operations, the quality and diversity of its portfolio of midstream assets, relatively high leverage, weak distribution coverage metrics and its affiliation with its general partner Energy Transfer Equity, LP (ETE; long-term IDR 'BB-'; Outlook Stable). The ratings consider that RGP is in the midst of a significant capital spending program which will see the company spend over $1 billion in growth cap-ex through 2013 and weigh on leverage metrics in the near to medium term. These growth investments are primarily focused on fee-based or revenue-assured assets, which should help lower RGP's exposure to changes in commodity prices. Additionally, Fitch expects RGP's leverage metrics will improve as it benefits from the earnings and cash flow associated with joint venture and organic projects as they are completed and begin operation.
Key Rating Factors
Fixed Fee Cash Flow Profile: RGP has over 80% of its gross margin supported by fixed fee type contracts which largely insulate it from direct changes in commodity prices. This translates to fairly predictable earnings and cash flow for the partnership. Additionally, RGP tries to layer on hedges to further lower open commodity price exposure.
Geographic and Business Segment Diversity: RGP has a diverse set of midstream assets which allow it to offer fully integrated midstream services to producers. Its assets are located in and around growing production basins that are liquids-rich and should continue to provide significant organic growth opportunities.
High Leverage/Improving Metrics: As a result of RGP's rapid growth over the past several years its leverage is high with Debt/Adjusted EBITDA for the LTM period ending June 30, 2012 of 4.7 times (x) based on Fitch calculations. Somewhat offsetting this high leverage is lower relative commodity price exposure due to the fixed fee focus of its business and the expectation that as its growth projects are completed RGP's rising EBITDA will lead to improvement in these metrics. Based on Fitch's calculations for Debt/Adjusted EBITDA, which excludes equity in earnings but includes dividends from unconsolidated affiliates, Fitch expects RGP's 2012 Debt/Adj. EBITDA of roughly 4.6x improving to closer to 4.1x by 2013 as growth projects are completed.
Large Capital Spending Plan: RGP has a significant capital expenditure program, with forecasted capital spending of over $1 billion for 2012 and 2013. RGP's large scale spending will weigh on metrics through 2013 prior to construction being completed and cash flows coming on line. Fitch expects RGP to fund its spending with a balance of debt and equity.
Tight Distribution Coverage: Fitch expects RGP's distribution coverage to be just under 1.0x for 2012, improving to 1.1x in 2013. Fitch prefers to see distribution coverage in excess 1.0x, as the cash retention can provide a financial cushion in a downturn, and help fund growth spending and or debt reduction.
Volumetric Exposure: As typical with gas processor and midstream companies, volumetric risk can be a concern, particularly in a declining rig count environment. However, production and volumes have largely held up or increased in RGP's operating basins, which Fitch expects to continue given the gas from these areas, like the Permian and Eagle Ford basins, tends to have a high liquids component or is tied to oil production which should remain strong given current NGL and oil economics.
JV/Structural Subordination: RGP is the owner of several joint venture (JV) interests some of which have external debt. RGP is structurally subordinate to the cash operating and debt service needs of these JVs and reliant on JV distributions to fund its capital spending and its own distributions.
General Partner Relationship: While Fitch's ratings are largely reflective of RGP's credit profile on a stand-alone basis, they do consider the company relationship with ETE, the owner of its general partner interest. ETE's general partner interest gives it significant control over the MLP's operations, including most major strategic decisions such as investment plans, distributions, and management of daily operations. The relationship has also provided opportunities that might otherwise be unavailable to RGP, such as RGP's acquisitions of MidContinent Express Pipeline (MEP; IDR 'BBB'; Outlook Stable) and LDH Energy Assets Holdings, from and with another ETE affiliate, Energy Transfer Partners, LP (ETP; IDR
'BBB-'; Outlook Negative) and its participation in its LoneStar JV with ETP.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Sustained improvement in leverage metrics;
--Successful execution of growth plan and continued metric improvements. Fitch would likely consider a positive rating action as Debt/Adj. EBITDA moves closer towards and below 4.0x and distribution coverage remains above 1.0x, provided RGP's 80%+ fee based margin profile and hedging practices stay consistent with current practices.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Continued large-scale capital expenditure program funded by higher than expected debt borrowings, with Debt/Adj. EBITDA above 4.8x on a sustained basis;
--An increase in gross margin sensitivity to changes in commodity prices;
--Significant and prolonged decline in demand/prices for NGLs, crude and natural gas;
--Aggressive growth of distributions at RGP and with continued distribution coverage below 1.0x.
Note: In its Master Limited Partnership analysis, Fitch typically adjusts EBITDA to exclude nonrecurring extraordinary items, and noncash mark-to-market earnings. Adjusted EBITDA excludes equity in earnings and includes dividends from unconsolidated affiliates.
Fitch currently rates RGP as follows:
--Long-term IDR 'BB'
--Senior Secured Revolver 'BB+'
--Senior Unsecured Notes 'BB'
--Series A Preferred Units 'B+'
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);
--'Master Limited Partnerships 101: Assessing MLPs in a High Growth Environment' (Nov. 1, 2011);
--'Parent and Subsidiary Rating Linkage ' (Aug. 8, 2012)
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Master Limited Partnerships 101
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis