Fitch Rates Energy Transfer Equity's Secured Term Loan Offering 'BB+'

NEW YORK--()--Fitch rates Energy Transfer Equity, L.P.'s (ETE) proposed $400 million incremental loan offering under its secured term loan due Dec. 2, 2019 'BB+'. The incremental loans will have similar terms and be fungible with the existing term loan. ETE's Issuer Default Rating (IDR) is 'BB' and its Rating Outlook is Stable. ETE will use the term loan proceeds to repay borrowings under its revolving credit facility and for general partnership purposes.

ETE currently owns the general partner (GP) and approximately 30.8 million Energy Transfer Partners, L.P. (ETP: IDR 'BBB-' with a Stable Outlook by Fitch) limited partner (LP) units, and 50.2 million ETP Class H units, which track the underlying economics of the GP and incentive distributions of Sunoco Logistics Partners L.P. (SXL: IDR 'BBB' with a Stable Outlook). ETE also owns the GP interest and 26.3 million Regency Energy Partners LP (RGP; IDR 'BB' with a Stable Outlook) LP units. On Feb. 19, 2014, ETE acquired Trunkline LNG Company, LLC (TLNG) from ETP. ETP is the indirect owner of 100% of Sunoco Inc. (SUN) and Panhandle Eastern Pipe Line Co. (PEPL). ETP also owns the GP and approximately 33.5 million limited partner (LP) units in SXL.

KEY RATING DRIVERS

Increased Scale and Diversity: Recently completed merger transactions and asset sales have resulted in a larger, more diversified, and generally stronger family of Energy Transfer companies. On a consolidated basis, the percentage of contractually supported fee-based margins has gradually increased. For ETP, which provided more than 90% of ETE's 2013 cash flow, commodity price exposure has been reduced. Also, ETE's and ETP's organizational structures have been simplified.

Leverage Metrics Will Weaken Modestly: ETE's adjusted debt-EBITDA, which measures ETE parent company debt against distributions it receives from its affiliates, approximated 3.1x in 2013. In December 2013, ETE's board authorized the repurchase by ETE of up to $1 billion of its common units at its discretion. Approximately $75 million of units had been repurchased as of Feb. 20, 2014. Furthermore, ETE has committed to purchase roughly $400 million of RGP common units in support of RGP's upcoming acquisition of Eagle Rock Midstream assets. Fitch expects ETE to use revolver drawdowns and issue new debt, including the newly rated term loan, to fund these purchases. Leverage will likely be maintained in the 3.0x to 4.0x range, ending 2014 at approximately 3.5x. A material weakening in leverage metrics beyond 4.5x could result in a negative rating action.

ETP's adjusted consolidated debt/EBITDA ended 2013 at approximately 4.3x, which is down from 4.6x in 2012. ETP is ramping down its aggressive capital expansion program with many projects recently coming on line. Depending on growth capital spending and funding strategies, ETP's adjusted consolidated debt/EBITDA should range between 4.0x and 4.5x in 2015 and 2016. Also considered in its rating is ETP's structural subordination to approximately $5.4 billion of subsidiary debt and uncertainties resulting from potential future structural changes as management attempts to further restructure the organization. A longer term concern relates to the potential effect on pipeline system utilization and related re-contracting risk resulting from changing natural gas supply dynamics.

On Feb. 19, 2014, ETE and ETP completed the transfer of TLNG to ETE in exchange for the redemption of $1 billion of ETP LP units held by ETE. ETE also anticipates that the Lake Charles Liquefaction project, currently being developed by ETE and ETP on a 60/40 ownership basis will be contributed to TLNG at the closing of project construction and related financing arrangements which are anticipated in mid-2015. Management expects that the export facility will be project-financed and its debt non-recourse to ETE. Fitch views the transaction as credit neutral for ETE, ETP, and PEPL.

Liquidity is Adequate: ETE has access to a $800 million secured five-year revolving credit facility that matures in October 2018. ETE's operating affiliates have significant operating flexibility with adequate liquidity and the ability to fund their planned growth with capital market transactions. Potential uses of the revolver include: funding stock buybacks, future acquisitions, and to initiate organic growth projects not financed at the MLPs. ETE has no debt maturing until 2018. Approximately $470 million was drawn under the revolver as of March 25, 2014.

The ETE revolver and Term Loan have 2 financial covenants: a maximum leverage ratio of 6.0 to 1.0; 7.0 to 1.0 during a specified acquisition period and fixed charge coverage ratio of 1.5 to 1.0. ETE notes, term loan and credit facility are secured by a first priority interest in all tangible and intangible assets of ETE, including its ownership interests in ETP, RGP, and TLNG.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--ETE parent company debt to EBITDA maintained below 1.5x;

--Improving credit profiles at ETP and RGP.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Increasing ETE parent company leverage above 4.5x;

--Weakening credit profiles at ETP and RGP.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology, Including Parent and Subsidiary Linkage' (Aug. 5, 2013);

--'Scenario Analysis: Lifting the Crude Export Ban' (Jan. 23, 2014);

--'Rating Pipeline, Midstream and MLPs-Sector Credit Factors' (Jan. 13, 2014);

--'NGL Pipelines: Northeast Supply Drives New Projects' (Dec. 20, 2013);

--'2014 Outlook: Midstream Services' (Dec. 10, 2013);

--'2014 Outlook: Crude Oil and Refined Products Pipelines' (Dec. 9, 2014);

--'2014 Outlook: Natural Gas Pipelines' (Dec. 5, 2013);

--'Crossover Credits in Natural Resources' (Oct. 31, 2013);

--'Credit Considerations for the GP/LP Relationship' (Nov. 6, 2013);

--'Funding U.S. LNG Export Facilities' (Aug. 20, 2013).

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Contacts

Fitch Ratings
Primary Analyst
Ralph Pellecchia
Senior Director
Fitch Ratings, Inc.
+1-212-908-0586
One State Street Plaza
New York, NY 1004
or
Secondary Analyst
Peter Molica
Director
+1-212-908-0288
or
Committee Chairperson
Mark Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Ralph Pellecchia
Senior Director
Fitch Ratings, Inc.
+1-212-908-0586
One State Street Plaza
New York, NY 1004
or
Secondary Analyst
Peter Molica
Director
+1-212-908-0288
or
Committee Chairperson
Mark Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com