NEW YORK--(BUSINESS WIRE)--Fitch Ratings has removed the ratings for Regency Energy Partners, LP (RGP; IDR: 'BB') from Negative Watch. In addition, Fitch has affirmed Regency's ratings with a Stable Outlook.
Approximately $3.0 billion in debt is impacted by today's rating action. A full list of ratings follows at the end of this press release.
Today's action removes the Rating Watch Negative Fitch placed on RGP following the announcement of RGP's intent to acquire PVR Partners, LP (PVR) in an unit-for-unit transaction valued at $5.6 billion (including the assumption of $1.8 billion in PVR debt). On Dec. 23, 2013 RGP announced two more acquisitions for approximately $1.6 billion [$1.3 billion for Eagle Rock Midstream (EROC) assets; $290 million for Hoover Energy Partners, LP (Hoover)]. RGP will be acquiring EROC's midstream business (primarily gathering systems and acreage dedications) in eastern Texas and the Texas panhandle.
The prior Ratings Watch reflected concerns about increased leverage and uncertainty around PVR's business risk. Fitch now believes RGP's business risk will not change materially and leverage and coverage metrics should remain within levels that are consistent with RGP's current 'BB' IDR rating. Fitch expects RGP's leverage to be high for 2014 (above 5.0x) as it completes these mergers, but improving back to between 4.5x to 5.0x in 2015 and further improving as earnings and cash flow from acquisitions and growth projects start to be fully realized on an annual basis.
Fitch believes that the acquisitions will not negatively impact credit quality or RGP's business risk. Fitch notes that the mergers will provide significant strategic benefits for RGP, including increased size, scale and business line diversity, favorable growth opportunities, and entry into the prolific Marcellus/Utica shales. The assets being acquired are complementary to RGP's existing businesses from a geographic perspective and should provide significant organic growth opportunities and easily achievable cost saving synergies.
KEY RATINGS DRIVERS
INCREASED SIZE/SCALE: The transactions significantly increase RGP's size and scale, which are critical components toward successfully operating MLPs, providing more diversified cash flows along with opportunities for growth. This increased size and scale should provide competitive advantages, operational and cost synergies, and help bolster RGP's capital market access. Additionally, the transactions provide strategic benefits from a geographic perspective providing a significant foothold in the growing Marcellus region, as well as, complementary Midcontinent, East Texas, and Permian Basin operations.
SIGNIFICANT GROSS MARGIN STABILITY: Pro-forma for the acquisitions, RGP will have over 72% of its gross margin supported by fee based contracts which are insulated from changes in commodity prices. PVR and Hoover are largely fee-based, and while EROC's gross margin is only roughly 40% fixed fee, RGP is committed to maintaining its current hedging practices. Roughly 28% of RGP's gross margin is exposed to commodity price changes, particularly changes in natural gas and natural gas liquids prices (NGLs). RGP hedges the majority of its current year open exposure, but is expected to have roughly 10% of gross margin fully exposed to commodity sensitivity. Should current hedging practices change materially to increase exposed gross margin Fitch would likely take negative ratings action.
INCREASED LEVERAGE: Based on Fitch calculations RGP's Debt/Adjusted EBITDA is expected to be above 5.0x for 2014, but return to the 4.5x - 5.0x range in 2015 and fall below 4.5x for 2016 and beyond. Acquisitions are being done with a significant equity component, but the PVR transaction in particular is slightly leveraging due to high leverage at PVR. Fitch expects distribution coverage between 1.0x to 1.25x for 2014 and 2015. 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. 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 does not adjust EBITDA for material projects currently under construction.
GENERAL PARTNER RELATIONSHIP: While Fitch's ratings largely reflect RGP's credit profile on a stand-alone basis, they also consider the company's relationship with Energy Transfer Equity, L.P. (ETE; IDR rated 'BB' by Fitch), 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. The relationship has also provided investment opportunities that might otherwise be unavailable to RGP. ETE will purchase roughly $400 million in equity from RGP in support of the EROC transaction.
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.
ADEQUATE LIQUIDITY: RGP currently has roughly $1.0 billion in availability under its $1.15 billion revolving credit facility. The revolving credit facility contains financial covenants requiring RGP and its subsidiaries to maintain a debt to consolidated EBITDA ratio(as defined in the credit agreement - including JV and material projects pro forma EBITDA) of less than 5.5x, consolidated EBITDA to consolidated interest expense ratio greater than 2.50x and a secured debt to consolidated EBITDA ratio less than 3.25x. As of Sept. 30, 2013 RGP was in compliance with all of its covenants, debt to EBITDA was 4.13x, interest coverage was 4.90x and senior secured leverage was 0.24x. Fitch expects RGP to be in compliance with its covenants pro-forma for the announced acquisitions.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Continued large-scale acquisitions, or capital expenditures funded by higher than expected debt borrowings;
--A failure to significantly hedge open commodity price exposure.
--Significant and prolonged decline in demand/prices for NGLs, crude and natural gas;
--Debt/Adj. EBITDA above the 4.5x to 5.0x range and distribution coverage below 1.0x on a sustained basis would likely lead to a one-notch downgrade.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Reduced business risk resulting from a higher percentage of fixed-fee operations;
--A material improvement in credit metrics with sustained leverage at 4.0x or below.
Fitch affirms Regency's ratings as follows:
--Long-term Issuer Default Rating at 'BB';
--Senior secured revolver at 'BB+';
--Senior unsecured notes at 'BB';
--Series A preferred units at 'B+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'2014 Outlook: Natural Gas Pipelines ', Dec. 10, 2013;
--'2014 Outlook: Midstream Services', Dec. 10, 2013;
--'2014 Outlook: Crude Oil and Refined Products Pipelines', Dec. 10, 2013;
--'NGL Pipelines: Northeast Surplus Drives New Projects', Dec. 20, 2013;
--'Credit Considerations for the GP/LP Relationship', Nov. 6, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Parent and Subsidiary Rating Linkage
2014 Outlook: Natural Gas Pipelines
2014 Outlook: Midstream Services
2014 Outlook: Crude Oil and Refined Products Pipelines
NGL Pipelines: Northeast Surplus Drives New Projects
Credit Considerations for the GP/LP Relationship