NEW YORK--(BUSINESS WIRE)--Fitch rates Sunoco Logistics Partners Operations L.P.'s senior unsecured notes 'BBB'. Proceeds from the offering are for the repayment of revolver borrowings and for general partnership purposes. Debt issued by Sunoco Logistics Partners Operations L.P. is guaranteed by Sunoco Logistics Partners L.P. (both entities collectively referred to as Sunoco Logistics). Fitch currently rates the entities as follows:
Sunoco Logistics Partners L.P.
--Long-term Issuer Default Rating (IDR) at 'BBB'.
Sunoco Logistics Partners Operations L.P.
--Long-term IDR at 'BBB;
--Senior unsecured debt at 'BBB';
--Senior unsecured bank facilities at 'BBB';
--Short-term IDR 'F2'.
The Rating Outlook for both entities is Stable.
KEY RATING DRIVERS
Sunoco Logistics' rating is supported by the following strengths:
--Large diversified asset base that serves high-demand markets;
--Stable, fee-based operations that account for a majority of the partnership's EBITDA;
--Supportive financial credit metrics including a strong distribution coverage ratio which indicate a less aggressive capital structure relative to its peers with similar ratings.
The ratings also factor in the following concerns:
--Expectations for increased leverage as Sunoco Logistics funds growth with debt in 2014 for expansion projects;
--Volatility and working capital needs associated with market-related operations;
--Potential for changes in strategy following the acquisition by lower rated Energy Transfer Partners (ETP; 'BBB-'/Stable Outlook), including a more aggressive business strategy or financial policy.
Leverage: At Dec. 31, 2013, leverage (as defined as Fitch as debt to adjusted EBITDA) was 2.9x. With the planned issuance of debt in early 2014, Fitch now expects leverage at the end of 2014 to be approximately 3.75x-4.0x.
Adequate Liquidity: At the end of 2013, Sunoco Logistics had $1.3 billion of liquidity which consisted of $39 million of cash and $1.3 billion undrawn on its revolver. The company has a $1.5 billion revolving credit facility due 2018. The revolver limits leverage (as defined by the bank agreement) to 5.0x at the end of each quarter. With certain acquisitions, leverage can temporarily increase to 5.5x. As of the end of 2013, bank defined leverage was 2.8x.
Maturities are manageable and include $175 million of notes which were due and repaid in February 2014 with revolver borrowings. The next bond maturity is $175 million due in 2016.
Capital Expenditures: Sunoco Logistics expects 2014 expansion capex to be at least $1.3 billion which would be a significant increase from $965 million of organic expansion capex in 2013.
Distributable Cash Flow and Coverage: Distributable cash flow (DCF) generated in 2013 was $655 million, an increase from $600 million in 2012. The distribution coverage ratio for 2013 was strong at 1.9x.
Fitch believes the current coverage ratio is high and will likely decline as distributions continue to grow. In recent years, the yearend coverage ratio ranged from a high of 2.4x in 2012 to a low of 1.3x in 2010.
Energy Transfer Partners L.P. (ETP; IDR 'BBB-'/Stable Outlook) owns the 2% general partner interest and a 32% interest in Sunoco Logistics.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--An increase in size and scale with maintenance of leverage near current levels over a sustained period of time.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Leverage (defined as debt to adjusted EBITDA) in excess of 4.0x on a sustained basis.
--Increased exposure to market-sensitive businesses and other more volatile operations without offsetting adjustments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Pipelines, Midstream, and MLPs - Sector Credit Factors' (Jan. 13, 2014);
--'Short-Term Ratings Criteria for Non-Financial Corporates', April 2, 2013;
--'2014 Outlook: Crude Oil and Refined Products Pipelines' (Dec. 10, 2013);
--'Pipelines, Midstream, and MLP Stats Quarterly - Third Quarter 2013' (Dec. 17, 2013);
--'Investor FAQs: Recent Questions on the Pipeline, Midstream and MLP Sectors' (Aug. 5, 2013).
Applicable Criteria and Related Research:
2014 Outlook: Crude Oil and Refined Products Pipelines
Pipelines, Midstream, and MLP Stats Quarterly -- Third-Quarter 2013
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pipelines, Midstream and MLPs -- Sector Credit Factors