NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to Regency Energy Partners L.P.'s (RGP) proposed $500 million senior unsecured notes offering due 2022. Proceeds from the notes will be used to repay borrowings outstanding under RGP's revolving credit facility and for general partnership purposes. The Rating Outlook is Stable.
RGP recently completed several significant acquisitions including PVR Partners, LP (PVR), Eagle Rock Midstream (EROC) assets, and Hoover Energy Partners, LP (Hoover). As a result, Fitch expects RGP's leverage to be high for 2014 (above 5.0x) as it completes and integrates these acquisitions. Fitch expects metrics to improve back to between 4.5x to 5.0x in 2015, further improving as earnings and cash flow from acquisitions and growth projects start to be fully realized on an annual basis.
Offsetting increased leverage is Fitch's belief 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 have significantly increased RGP's size and scale, which are critical components for successfully operating master limited partnerships (MLPs). The acquisitions help provide more diversified cash flows, competitive advantages in the form of operational and cost synergies, and RGP's larger size should improve capital market access. Additionally, the transactions provide 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 has 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 rating actions.
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 in 2014 and 2015. Fitch prefers to see distribution coverage in excess of 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; Fitch IDR 'BB'), 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.
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 $349 million in availability under its $1.5 billion revolving credit facility (RCF). The RCF 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 March 31, 2014, RGP was in compliance with all of its covenants.
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/Adjusted EBITDA above the 4.5x to 5.0x range and distribution coverage below 1.0x on a sustained basis would also likely lead to a 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;
--Material improvement in credit metrics with sustained leverage at 4.0x or below.
Fitch currently rates Regency as follows:
--Long-term Issuer Default Rating 'BB';
--Senior secured revolver 'BB+';
--Senior unsecured notes 'BB';
--Series A preferred units 'B+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014;
--'Rating Pipelines, Midstream, and MLPs - Sector Credit Factors', Jan. 13, 2014;
--'Liquidity Review: Pipelines, Midstream and MLPs', July 21, 2014;
--'North American Energy Outlook and LNG', July 16, 2014;
--'U.S. Midstream Dashboard', June 27, 2014;
--'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:
Credit Considerations for the GP/LP Relationship
NGL Pipelines: Northeast Surplus Drives New Projects
2014 Outlook: Crude Oil and Refined Products Pipelines
2014 Outlook: Midstream Services
U.S. Midstream Dashboard
North American Energy Outlook and LNG
Liquidity Review: Pipelines, Midstream and MLPs
Rating Pipelines, Midstream and MLPs -- Sector Credit Factors