Fitch: ETE's Convertible Preferred Offering Enhances Liquidity; Neutral to Credit Profile

NEW YORK--()--Fitch Ratings believes that Energy Transfer Equity, LP's (ETE; Issuer Default Rating (IDR)'BB'/Stable Outlook) private offering of Series A Convertible Preferred Units is a proactive step in enhancing its liquidity and managing acquisition leverage in a credit neutral manner. The announced preferred issuance has no immediate impact to ETE's ratings. Fitch considers the mandatory convertible preferred units to be equity.

The current rating and Outlook reflect ETE's size, scale, asset quality, manageable maturity schedule, and structural subordination to its operating subsidiaries. Concerns include capital market constraints, high leverage pro-forma for the acquisition of The Williams Companies (WMB; 'BB+'/ Rating Watch Negative), and the significant structural subordination of ETE's debt to subsidiary level debt and its reliance on subsidiary distributions to support its obligations. Fitch expects that following the merger, ETE's operating and financial profile will remain consistent with its 'BB' Issuer Default Rating. ETE's IDR is two notches below the IDRs of its operating subsidiaries, providing the majority of ETE's earnings and cash flow.

Leverage at ETE is expected to be high on a stand-alone basis driven in part by the $6.05 billion term loan which will be used to fund the cash portion of the WMB merger. Fitch forecasts ETE/WMB leverage to be roughly $16 billion by yearend 2016 on a parent level basis. The preferred offering along with a manageable maturity ladder, with the combined entity having no significant parent-level debt maturities until 2018, should free up some liquidity and provide near term financial flexibility in the current capital market environment. In late-October 2015, ETE entered into a senior secured credit facility for $6.05 billion in order to fund the cash portion of the WMB Merger. Under the terms of the facility, the banks have committed to provide a 364-day secured loan that can be extended at ETE's sole option for an additional year. This should allow ETE to be opportunistic with regard to the timing of refinancing as and if hydrocarbon prices start to recover and capital markets access for midstream issuers begins to open up.

Weakening credit profiles or negative rating actions at ETE's underlying subsidiary partnerships could lead to a negative rating action at ETE. Fitch would ultimately seek to maintain a one-to-two notch separation between ETE and the entities providing the majority of the cash needed to support ETE's structurally subordinated debt. In the near term, distributions from ETE's underlying partnership subsidiaries could slow, given the current constricted capital market environment and continued commodity price weakness. While not currently forecasted, Fitch believes there is room for ETE to forgo some of the distribution growth it expects to receive in order to support its underlying partnerships' credit quality. A rise in leverage from temporarily forgoing distributions would not necessarily warrant a negative rating action at ETE provided any action helps maintain the underlying subsidiary's current credit ratings, and any resulting increase in ETE leverage beyond Fitch's 4.5x standalone sustained target is temporary. Fitch expects leverage at ETE on a standalone basis (inclusive of WMB debt) to be roughly 4.5x to 5.0x for 2016 improving to below 4.5x in 2017 and beyond. Fitch typically assess ETE based on the cash flows derived from distributions from its underlying partnership subsidiaries less ETE specific expenses relative to the amount of its direct debt and interest payments at the ETE level.

Fitch's base case assumption is that the merger closes as currently proposed sometime in the 2Q 2016. While concerns around higher leverage and Williams Partners' (WPZ; BBB-/Stable Outlook) exposure to Chesapeake Energy (B-/Negative Outlook) are near term negatives, Fitch continues to believe from an operational standpoint, WMB's (and WPZ) addition to the ETE family of partnerships would have many strategic positives. Generally, bigger is better in the MLP space. The size, scale, and geographic and business line diversity that a combination of WMB with the ETE family would create could provide a significant opportunity for benefits on projects and existing assets from all the affiliated entities as well as operational and financial synergies. Fitch believes that commodity prices will gradually improve over the next three years which should provide some uplift to the midstream space.

Additional information is available on www.fitchratings.com.

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Contacts

Fitch Ratings
Primary Analyst
Peter Molica
Senior Director
+1-212-908-0288
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Kathleen Connelly
Director
+1-212-908-0290
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Peter Molica
Senior Director
+1-212-908-0288
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Kathleen Connelly
Director
+1-212-908-0290
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com