NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Energy Transfer Partners, LP's (ETP) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. ETP's Rating Outlook is Stable.
ETP announced that it would be acquiring the general partner and associated incentive distribution rights, as well as 6.3 million common units and 20 million subordinated units in PennTex Energy Partners, LP (PTXP). The common/subordinate unit interests in PTXP represent 65% of the total limited partnership interest in PTXP. Total consideration paid by ETP will be $640 million, paid with 50% ETP common units and 50% cash. The cash portion of the purchase price will be funded with a combination of proceeds from common units recently issued under ETP's At-The-Market program and borrowings under its revolving credit facility. Additionally, in conjunction with the transaction, Energy Transfer Equity, L.P. (ETE, Long-Term IDR 'BB'/Stable Outlook) has agreed to an incentive distribution waiver in the amount of $33 million annually that will run in perpetuity. The transaction is expected to close in the fourth quarter of 2016, subject to customary closing conditions.
Fitch views the acquisition to be neutral to ETP's credit profile. PTXP's assets, while limited in size and scale, are complementary to ETP's asset in the regions which will provide some strategic benefits to ETP. PTXP's cash flows are supported by long-term contracts with minimum volume commitments (MVC) which should provide a reasonable amount of cash flow stability to the asset base being acquired. Fitch believes that the transaction itself will not move ETP credit metrics as it has been structured with a favourable equity component and is expected to be a deleveraging transaction for ETP.
ETP's Ratings and Outlook reflects the size and scale of ETP's operations which offer both business line diversity and geographic diversity, with operations spanning most major domestic production basins. The affirmation recognizes that ETP's earnings and cash flow should be relatively stable near term even with continued price weakness, driven by an expected 90% of 2016 gross margin derived from fixed-fee contracts.
The ratings consider that ETP's adjusted leverage is currently high, ending 2015 at roughly 5.3x based on Fitch's calculations. Fitch calculates ETP's adjusted debt/EBTIDA on a consolidated basis inclusive of Sunoco Logistics Partners, LP (SXL; 'BBB'/Stable Outlook) and cash distributions from unconsolidated affiliates. Fitch expects consolidated adjusted leverage in 2016 to improve slightly but remain high at roughly 5x at year-end 2016 improving to below 5x in 2017 and beyond.
Additional concerns include ETP's structural subordination to subsidiary debt and uncertainties resulting from potential future structural changes. The PTXP transaction introduces another publicly traded MLP into ETP and ultimately ETE family increasing the complexity within ETE's portfolio of partnerships.
KEY RATING DRIVERS
Large Diversified Asset Base: ETP's geographic and business line diversity provide a solid operating asset base and what has been a decent platform for growth within most of the major U.S. production regions. Currently the partnership and its subsidiaries (including SXL) own and operate roughly 62,500 miles of natural gas, crude and natural gas liquids (NGL) pipelines, 65 processing plants, treating plants and fractionators, significant compression, and large-scale, underground liquid and natural gas storage. EBITDA is pretty evenly earned between ETP's various business lines approximately as follows: Interstate Pipelines 20% of EBITDA (at Dec. 31, 2015); Intrastate Pipelines 10%; Midstream 23%; Liquids transport & Services 11%; Crude Oil/Refined Products (SXL) 18%: Retail Marketing 13% (Sunoco LP) and Other (a variety of other business segments but primarily a 33% ownership in PES, a refinery JV with Carlyle group) at 5%.
While commodity price exposure and counterparty risks are relatively limited, some of ETP's businesses are subject to both counterparty and volumetric risks, namely the midstream business. The midstream segment is focused on gathering, compression, treating, blending, and processing in several regions across the U.S. With commodity prices remaining relatively low and producers continuing to be mindful of production budgets, production will be challenged in several of ETP's operating regions, but overall its geographic diversity and a rising price deck should help limit volumetric risks. The potential effect on pipeline system utilization and related re-contracting risk resulting from changing natural gas supply dynamics is a longer term concern.
Relatively Stable, Consistent Cash Flows: As ETP has grown its large asset base the percentage of gross margin supported by fee-based contracts has gradually increased, with the partnership moving from roughly 76% either fee-based or hedged for 2015 (71% fee/5% hedged) up to 90% expected for in 2016, due in part to new projects coming online with heavy fee-based components. Counterparty exposure is significantly weighted toward investment-grade names, with roughly 88% of ETP's counterparties investment-grade. No single customer accounts for more than 10% of revenue, and its top 20 customers which account for approximately 46% of a total $1.4 billion in unsecured exposure is rated 'BBB' or better with only $28 million in exposure 'BB+' or lower.
Moderate Financial Flexibility: ETP has largely met all of its capital needs for 2016 for all of its expected capital spending (including distributions and growth spending). The incentive distribution waivers provided to ETP from ETE will provide retained cash to help fund its capital program. Additionally the pending sale of a portion of its interest in the Bakken projects and the non-recourse project funding has helped to raise capital for ETP's project backlog in a relatively benign way to ETP's balance sheet. Fitch notes that the Bakken projects are currently subject to increased regulatory uncertainty and further potential delays. These uncertainties have the potential to negatively impact ETP's credit profile, particularly, if the sale of the interest in the pipeline does not get completed, though Fitch currently views this potential as remote.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for ETP include:
--Growth spending consistent with management guidance.
--Growth spending declining in 2017-2019. Proceeds from debt and equity issuances will be used to fund spending in a balanced manner to protect the balance sheet.
--Flat distribution in 2016 with slight to moderate distribution growth in outer years.
--Interest in PTXP acquired for $640 million, paid with 50% ETP common units and 50% cash with the acquisition closing before year-end 2016. The cash portion of the purchase price funded with a combination of proceeds from common units and borrowings under its revolving credit facility.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A material improvement in credit metrics with ETP adjusted leverage sustained at below 4.0x on a consolidated basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Weakening credit metrics with adjusted consolidated leverage (Debt/Adj. EBITDA) above 5x on a sustained basis would likely lead to a downgrade to 'BB+'; Fitch expects adjusted consolidated leverage for 2016 to be at or slightly above 5.0x, but improve to below 5.0x in 2017 and beyond;
--Continued distribution coverage below 1.0x. Fitch expects 2016 distribution coverage to be at or slightly below 1x improving to above 1.0x in 2017 and beyond;
--Increasing commodity exposure above 30% could lead to a negative rating action if leverage were not appropriately decreased to account for increased earnings and cash flow volatility.
LIQUIDITY
Liquidity is Adequate.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Energy Transfer Partners, LP
--Long-Term IDR at 'BBB-';
--Senior unsecured rating at 'BBB-';
--Short-Term IDR at 'F3';
--Commercial Paper at 'F3'.
--Junior subordinated notes at 'BB'.
The Ratings Outlook is Stable
Summary of Financial Statement Adjustments - Fitch typically adjusts EBITDA for Master Limited Partnerships (MLP) like ETP to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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