Fitch Rates Energy Transfer Partners' CP 'F3'; Affirms IDR & Sr. Unsecured at 'BBB-'

NEW YORK--()--Fitch Ratings has assigned an 'F3' rating to Energy Transfer Partners, LP (ETP) $3.75 billion commercial paper (CP) program. The program is backstopped by the partnership's $3.75 billion revolving credit facility (RCF) which matures in 2019. The CP will rank pari passu with the partnership's senior unsecured debt. In addition, Fitch assigns an 'F3' Short-Term Issuer Default Rating (IDR) to ETP. Fitch has also affirmed the following existing ratings:

Energy Transfer Partners, LP

--Long-Term IDR at 'BBB-';

--Senior unsecured rating at 'BBB-';

--Junior subordinated notes at 'BB'.

The Rating Outlook is Stable.

The affirmation of ETP's rating 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. Counterparty exposure remains a concern with continued bankruptcies within the upstream space expected near term but Fitch expects ETP's counterparty portfolio to remain heavily weighted toward investment-grade counterparties.

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.

ETP's capital spending budget remains relatively robust, but the partnership has taken steps to raise needed funding and improve its balance sheet through alternative means, including the recent non-recourse project financing and sale of a portion of its Bakken Pipeline project. The announced additional waiver of $720 million in incentive distributions rights by ETP's owner and general partner, Energy Transfer Equity, LP (ETE; IDR: 'BB'/Stable Outlook) should help ETP retain cash for its funding needs. Along with previous waivers that ETE had provided ETP, the incentive distribution waivers will provide over $1.1 billion in retained cash that otherwise would have been available for distributions. Fitch expects that these recent steps will help ETP improve leverage.

Other considerations include ETP's structural subordination to subsidiary debt and uncertainties resulting from potential future structural changes. The potential effect on pipeline system utilization and related re-contracting risk resulting from changing natural gas supply demand dynamics are longer-term concerns.

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. It is geographically located in the Austin Chalk trend and Eagle Ford Shale in South and Southeast Texas, the Permian Basin in West Texas and New Mexico, the Barnett Shale and Woodford Shale in North Texas, the Bossier Sands in East Texas, the Marcellus Shale in West Virginia and Pennsylvania, and the Haynesville Shale in East Texas and Louisiana. With low commodity prices, production will be challenged in several of these regions, but the geographic diversity should help. 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 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.

High Leverage; Adequate Distribution Coverage: ETP leverage is currently high, with YE2015 leverage on a consolidated basis of roughly 5.3x (inclusive of distributions from non-consolidated joint ventures) and roughly 5.1x on a last 12 month basis as of June 30, 2016. Fitch expects 2016 leverage on a consolidated basis of roughly 5.0x improving modestly to between 4.75x and 4.9x annually through 2019. Management remains committed to an investment-grade profile, and expects leverage as per their revolver covenant calculation of 4.2x for 2016 (given a material project adjustment to EBITDA of approximately $650 million). Leverage at ETP was high for 2015 in part due to falling commodity prices, but also due in part to the merger ETP completed with its affiliate company Regency Energy Partners, LP (RGP) in April 2015. Distribution coverage is expected to be roughly 1x for 2016 improving to above 1x assuming flat distributions for 2016 and 2017.

KEY ASSUMPTIONS

--Growth spending consistent with current management guidance. --Growth projects completed on time at an average 8.0x EBITDA multiple.

--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.

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 4x on a consolidated basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Weakening credit metrics with adjusted leverage above 5x on a sustained basis would likely lead to a downgrade to 'BB+'; Fitch expects adjusted leverage for 2016 to be at or slightly above 5x, but improve to below 5x 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 Adequate: ETP has access to a $3.75 billion secured five-year RCF that matures in November 2019 which will back the CP program. As of June 30, 2016, ETP had roughly $2.6 billion in availability under its revolver. The credit facility contains a financial covenant that provides that on each date ETP makes a distribution, the leverage ratio, as defined in the credit agreement, shall not exceed 5x, with a permitted increase to 5.5x during a specified acquisition period, as defined in the credit agreement. ETP is currently in compliance with this covenant. As per the covenant EBITDA definition, ETP is permitted a material project adjustment which adds back incremental EBITDA for projects currently under construction. This gives ETP a fair amount of headroom with regard to its leverage covenant. ETP was well within covenant compliance for 2015 and its management expects the calculation of the covenant to remain well below 4.5x for the balance of 2016.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Energy Transfer Partners, LP

--Short-term IDR: 'F3';

--Commercial Paper: 'F3'.

Fitch has affirmed the following ratings:

Energy Transfer Partners, LP

--Long-Term IDR at 'BBB-';

--Senior unsecured rating at 'BBB-';

--Junior subordinated notes at 'BB'.

The Rating Outlook is Stable.

Additional information is available at www.fitchratings.com

Summary of Financial Statement Adjustments - Fitch calculates ETP's adjusted debt/EBITDA on a consolidated basis inclusive of Sunoco Logistics Partners, LP and cash distributions from unconsolidated affiliates but exclusive of equity in earnings and any debt from non-consolidated entities.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

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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
Secondary Analyst
Kathleen Connelly
Director
+1-212-908-0290
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
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
Secondary Analyst
Kathleen Connelly
Director
+1-212-908-0290
or
Committee Chairperson
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com