NEW YORK--()--Fitch Ratings assigns a 'BBB-' rating to Energy Transfer Partners, L.P.'s (ETP) proposed offering of $1.0 billion to $1.25 billion of senior notes due 2023 and 2043. Note proceeds will be used to reduce short-term debt. The Rating Outlook for ETP is Negative.
SUNOCO MERGER COMPLETED
On Oct. 5, 2012, ETP completed a merger with Sunoco, Inc. (SUN). Contemporaneously with the closing of the merger SUN contributed to ETP $2.0 billion in cash and 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 by Fitch) in exchange for 90,706,000 newly issued Class F units of ETP. Additionally, immediately following the merger, Energy Transfer Equity, L.P. (ETE), owner of ETP's GP, contributed its interest in Southern Union Company (SUG IDR 'BBB-'; Stable Outlook) 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.
UTILITY SALE CREDIT NEUTRAL
On Dec. 17, 2012, ETP announced an agreement to sell SUG's gas utility operations in Missouri and New England for $1.015 billion of cash and $20 million of assumed debt. The transaction is expected close by the end of the third quarter of 2013. Sale proceeds are expected to be used to repay a portion of SUG's outstanding debt. Fitch expects the utility sale to be credit neutral for ETP, ETE, and SUG.
Fitch believes the SUN merger and resulting Holdco provides meaningful benefits to ETP. The merger diversifies and increases the scale of ETP's operations, and allows for the purchase of SXL interests and drop down of SUG assets under ETP control while minimizing transactional risk and external financing. The merger has also resulted in a higher percentage of contractually supported fee-based margins.
SUN and SXL will add crude oil, refined products, and retail operations to ETP's operations. SUG provides stable interstate pipelines and midstream services. Also, in January 2012 ETP sold its propane operations which reduced its sensitivity to weather and commodity prices.
Furthermore, ETP Holdco should generate tax benefits and contribute to improving adjusted leverage metrics at ETP, which Fitch anticipates will decline to the 4.0x to 4.25x range in 2013 from more than 4.5x today.
ETP's current Negative Outlook reflects its aggressive acquisition and organic growth activities and credit metrics which are currently weak for its rating category. 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.
LIQUIDITY IS ADEQUATE
ETP has access to a $2.5 billion unsecured revolving credit facility that matures on Oct. 27, 2016. At Jan. 8, 2013, $1.45 billion of borrowings and $73.9 million of 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 Sept. 30, 2012, ETP's revolver leverage ratio, which includes a material projects adjustment, was 4.33x.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--An inability to maintain adjusted consolidated debt to EBITDA below 5.0x; and
--Poor operating performance at ETP or poor operating performance and/or negative rating actions at SXL, SUN, and SUG: and
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A lessening of consolidated company business risk including lower commodity price exposure;
--Improving operating performance; and
--Expectations for sustainable adjusted consolidated debt to EBITDA in the 4.0x to 4.25x range or below.
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' (Sept. 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);
--'Natural Gas Pipelines: Hot Topics' (Oct. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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