NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BBB' rating to Sunoco Logistics Partners Operations L.P. planned issuance of senior unsecured notes. Proceeds from the offering are for 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) 'BBB'.
Sunoco Logistics Partners Operations L.P.
--Long-term IDR 'BBB;
--Senior unsecured debt 'BBB';
--Senior unsecured bank facilities '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 a temporary increase in leverage in 2014 as Sunoco Logistics funds growth with debt 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-' with a Stable Outlook by Fitch), including a more aggressive business strategy or financial policy.
Diversified Asset Base: Sunoco Logistics benefits from a mix of fee-based assets consisting of crude oil pipelines, refined product pipelines, and refined product and crude oil terminal facilities. Sunoco's LTM adjusted EBITDA was $944 million and segment contributions were: 42% crude oil pipelines, 17% crude oil acquisition and marketing, 32% terminal facilities, and 8% from refined products pipelines.
The crude oil pipelines are mostly located in Oklahoma and Texas. It has 5,300 miles of trunk pipelines and 500 miles of crude oil gathering lines which connect to the trunk pipelines. This segment should see significant growth going forward given the number of projects underway. The crude oil acquisition and marketing business gathers, purchases, markets and sells crude primarily in the mid-continent. This is Sunoco Logistics' segment which tends to have some volatility. This business benefits when crude price differentials have wide spreads. In the current crude price environment with narrow differentials, opportunities decrease.
The terminals facilities have oil and refined products storage capacity of 46 million barrels including 22 million barrels of storage and Nederland, Texas, five million at Marcus Hook, PA (refined products and natural gas liquids terminal), 39 refined product terminals in the northeast, Midwest and southwest. It also has several refinery terminals in the northeast. The refined products pipelines have 2,300 miles of refined products pipelines and joint venture interest in four refined products pipelines. This segment should also see substantial growth in the future due to NGL pipeline projects that are currently being developed.
Leverage: At Sept. 30, 2014, leverage (as defined as Fitch as debt to adjusted EBITDA) for the LTM was 3.9x, up significantly from 2.9x at the end of 2013. The increase in leverage is attributed to rising debt which increased to $3.6 billion at the end of the recent quarter from $2.5 billion at the end of 2013.
With the pending note offering, Fitch now expects leverage at the end of the year to be in the range of 4.0 - 4.5x depending on the size of the pending debt issuance. Previously, Fitch forecasted yearend leverage to be just above 4x. Expectations for higher leverage are due to increased borrowings to fund organic growth projects which should provide Sunoco Logistics with stable cash flows once construction is complete.
Adequate Liquidity: As of Sept. 30, 2014, Sunoco Logistics had approximately $1 billion of liquidity which consisted of $58 million of cash and $975 million 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 recent quarter, bank defined leverage was 3.2x leaving significant cushion for the bank covenant. Maturities are manageable and the next bond maturity is $175 million due in May 2016.
Capital Expenditures: With multiple projects underway and planned, Sunoco Logistics now expects 2014 expansion capex to be approximately $2.5 billion. It forecasts $2 billion in 2015. Fitch expects Sunoco Logistics to balance funding with a combination of debt and equity. The partnership has launched its second at-the-market equity issuance program for the issuance of up to $1 billion of units. Its prior program was for $250 million and has been completed.
Mariner East 2 had a successful open season and Sunoco Logistics will move forward with this significant project which is estimated to cost $2.5 billion. This is a pipeline and export project that will move NGLs from the Marcellus and Utica to Sunoco Logistics' Marcus Hook complex in Pennsylvania. At Marcus Hook, NGLs can be stored and distributed domestically and internationally. Mariner East 2's initial capacity will be 275,000 barrels per day (bpd) and the pipeline will be designed to have increased capacity. Regulatory and permit approvals are required. Sunoco Logistics currently expects this project to be in service at the end of 2016.
Distributable Cash Flow and Coverage: Distributable cash flow (DCF) generated in the LTM ending Sept. 30, 2014 was $730 million, up from $655 million in 2013. The distribution coverage ratio for the LTM ending Sept. 30, 2014 was strong at 1.8x.
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 a 1.9% general partner interest and a 29.8% limited partnership interest in Sunoco Logistics Partners L.P. Energy Transfer Equity, L.P. (ETE; IDR 'BB'; Stable Outlook), ETP's parent, owns the remaining 0.1% of the general partner.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action is not expected at this time. Leverage would need to be reduced to below 3.0x on a sustained basis along with a significant increase in scale.
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-4.25x on a sustained basis.
--Increased exposure to market-sensitive businesses and other more volatile operations without offsetting adjustments.
Applicable Criteria and Related Research:
--'MLP End Game: Common Goals - Divergent Strategies' (November 2014);
--'Bakken Shale Report: Prolific Oil Production Prompts New Pipelines' (October 2014);
--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - Second Quarter 2014' (September 2014);
--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);
--'Liquidity Review: Pipelines, Midstream and MLPs' (July 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Non-Traditional MLP Assets (Changing Mix, Changing Risk)' (May 2014);
--'MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)' (March 2014);
--'Rating Pipelines, Midstream and MLPs: Sector Credit Factors' (January 2014).
Applicable Criteria and Related Research:
MLP End Game (Common Goals ￢ﾀﾔDivergent Strategies)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=802308
Bakken Shale Report (Prolific Oil Production Prompts New Pipelines)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=783488
What Investors Want to Know: Pipelines, Midstream and MLPs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=785149
Pipelines, Midstream and MLP Stats Quarterly -- Second-Quarter 2014 (Second-Quarter Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=775928
Midstream Spending Significantly Rising for MLPs and C-Corps
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759467
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=921455
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