NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed Sunoco Logistics Partners L.P. and its operating partnership, Sunoco Logistics Partners Operations L.P. (both entities collectively referred to as Sunoco Logistics) on Rating Watch Negative. This action follows Sunoco Logistic's announcement that it would acquire Energy Transfer Partners, LP (Energy Transfer Partners; 'BBB-'/Outlook Stable) in a unit-for-unit transaction.
Fitch has placed the following ratings on Rating Watch Negative:
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';
--Commercial Paper (CP) 'F2'.
Debt issued by Sunoco Logistics Partners Operations L.P. is guaranteed by Sunoco Logistics Partners L.P. Approximately $6 billion in debt is affected by today's rating action.
KEY RATING DRIVERS
Sunoco Logistics' rating is on Rating Watch Negative following the pending acquisition of lower rated Energy Transfer Partners. While Sunoco Logistics will increase significantly in size and scale, the transaction will also raise leverage, which has already been high. After the transaction closes, Fitch anticipates that leverage will remain elevated for several quarters. Previously, Fitch anticipated that leverage would be reduced to below 4.5x in 2017. With the pending transaction, Fitch now projects leverage to be just under 5.0x by the end of 2017. Since leverage at the partnership had already been high, Fitch has previously noted that negative rating action would occur if leverage was not reduced to below 4.5x.
Fitch will resolve the Rating Watch Negative at or near the closing of the merger. The most likely scenario is that the rating will be downgraded one notch to 'BBB-' given expectations for leverage to remain high. While not expected, the existing ratings may remain in place if leverage is forecasted by Fitch to be under 4.5x on a sustained basis.
Sunoco Logistics is making the acquisition by exchanging 1.5 common units of Sunoco Logistics for each common unit of Energy Transfer Partners. Debt at Energy Transfer Partners will be assumed by Sunoco Logistics. The transaction is expected to close during the first quarter of 2017 subject to Energy Transfer Partners unitholder approval and other customary conditions. Upon completion of the merger, the combined entity will be named Energy Transfer Partners.
Sunoco Logistics and Energy Transfer are both master limited partnerships (MLPs) in the Energy Transfer Equity LP (Energy Transfer Equity) family. The combination of the two MLPs will help simplify the structure at Equity Transfer Equity. In addition, management has forecasted $200 million of commercial synergies and cost reductions by 2019. With Energy Transfer Partner's distributions being reduced to Sunoco Logistics' distributions, the combined entity will have additional retained cash available for spending. Additionally, the combined entity will become the second largest MLP with a strong focus in core areas such as the liquids-rich Permian and the natural gas shale plays in the Marcellus and Utica. There will also be a strong presence in the Gulf Coast.
Concerns are focused on Sunoco Logistics leverage, which has been high and will continue to be elevated once the transaction closes. Leverage has been ramping up given the partnership's growth spending. The ability to achieve the full $200 million of synergies by 2019 is also uncertain. Given the need for Energy Transfer Partners' unitholder approval of the transaction, execution risk also exists. Once the pending merger closes, Fitch believes there is uncertainty as to what additional simplification measures Energy Transfer Equity may make given its stated goal of increasing simplicity in its structure.
Additional concerns include the pending sale and completion of construction on Sunoco Logistics and Energy Transfer Partner's Bakken pipeline project. The Bakken projects are currently subject to increased regulatory uncertainty and further potential delays. These uncertainties have the potential to negatively impact Sunoco Logistics' credit profile, particularly, if the sale of the interest in the pipeline does not get completed, though Fitch currently views this potential as remote.
Fitch's key assumptions within the rating case for Sunoco Logistics include the following:
--The pending transaction with Energy Transfer Partners occurs as planned and the transaction closes in the first quarter of 2017;
--Leverage at year-end 2017 is just below 5.0x; Fitch expects leverage to decline in the following two years.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action would occur if Fitch anticipated that leverage (defined as debt-to-adjusted EBITDA) would be below 4.5x on a sustained basis. Should the transaction close as planned, positive rating action is not anticipated since leverage has already been trending above 4.5x for a number of quarters.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Leverage in excess of 4.5x on a sustained basis. If the acquisition of Energy Transfer Partners occurs as planned, Fitch expects the rating to be downgraded one notch to 'BBB-'.
Sunoco Logistics has sufficient liquidity in the near term. At the end of 3Q16, it had over $1.9 billion of liquidity which consisted of $39 million of cash and approximately $1.8 billion undrawn on its revolver due 2020. The partnership has a $2.5 billion commercial paper program that is backed by the revolving credit facility.
The revolver limits leverage (as defined by the bank agreement) to 5.0x at the end of each quarter. With certain acquisitions, leverage could temporarily increase to 5.5x. The bank definition of EBITDA gives pro forma credit for acquisitions and material projects. The definition of debt carves out borrowings used for contango trades up to $500 million.
As of the end of 3Q16, bank defined leverage was 3.6x, leaving significant cushion for the bank covenant. In May 2016, Sunoco Logistics paid off $175 million of debt that became due. Future maturities are manageable and the next bond maturity is $250 million due in 2020.
Summary of Financial Statement Adjustments - Fitch typically adjusts EBITDA for Master Limited Partnerships (MLP) like Sunoco Logistics to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001