TEXT-S&P takes actions on Energy Transfer Partners, Sunoco on sale
Overview -- U.S. midstream energy master limited partnership Energy Transfer Partners (ETP) announced an agreement to purchase Sunoco Inc. for $5.3 billion. -- We are affirming our 'BBB-' corporate credit rating on ETP and revising the outlook to stable from negative. -- We are also placing the 'BB+' corporate credit rating on Sunoco on CreditWatch with positive implications. We are also placing the 'BBB' corporate credit rating on Sunoco Logistics Partners on CreditWatch with negative implications. -- The stable outlook on our rating for Energy Transfer Partners reflects our expectation that its debt/EBITDA will be near or about 4.5x in the long-term because we expect the company's more diversified mix of assets can tolerate somewhat higher debt leverage for the rating than currently. Rating Action On April 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' corporate credit rating Energy Transfer Partners L.P.'s (ETP) and revised the outlook to stable from negative. We also placed the 'BB+' corporate credit rating on Sunoco Inc. on CreditWatch with positive implications. In addition, we placed the 'BBB' corporate credit rating on Sunoco Logistics Partners L.P. on CreditWatch with negative implications. We affirmed the 'BB' corporate credit rating on Energy Transfer Equity L.P. (ETE) and maintained the stable outlook. Rationale We have reviewed the $5.3 billion transaction and believe it will be slightly positive for ETP's credit risk profile because it is broadly neutral to the company's debt leverage measures. At the same time, it would extend ETP's scale and enhance its competitive position across the natural gas, oil, and natural gas liquids (NGL) value chain. The contribution from ETP's challenged intrastate natural gas business will also notably decrease and be replaced by Sunoco's more stable crude oil and refined products transportation assets. ETP's EBITDA base will grow materially to about $3 billion with its overall cash flow diversity notably improving, too. The transaction does, however, lend further credence to ETP's highly aggressive growth strategy and that of the ETE family of companies as a whole. ETP will fund the purchase with 50% common units and 50% cash. Sunoco's $965 million of debt will remain outstanding. The CreditWatch listings on Sunoco and Sunoco Logistics reflect our expectation that their corporate credit ratings will be in line with that of ETP. Sunoco will be a wholly owned subsidiary, with ETP's management controlling Sunoco and exerting significant control over Sunoco Logistics, given its role as general partner. ETP will in essence control Sunoco Logistics as its general partner and its role on the company's board of directors. Sunoco Logistics is also ultimately controlled by ETE, through ETP, so we feel its rating is limited to 'BBB-'. There is no effect on our rating and outlook on ETE. ETE's debt leverage measures will improve slightly given the Sunoco addition. However, the improvement is not sufficient to warrant a higher rating or positive outlook at this time. We expect ETE's credit measures to remain appropriate for the rating. We expect ETE's stand-alone debt/EBITDA to be about 3.5x in 2013 versus previous expectations of 3.75x. We also expect ETE's consolidated debt/EBITDA to be just over 5x in 2013 versus previous expectations of about 5.5x. We link the ratings on ETE and ETP, and ultimately Sunoco and Sunoco Logistics, because several members of the management teams and boards of directors overlap. In addition, ETE can, through its general partner interest, significantly influence the business activities and financial policies, including setting distribution levels. We expect ETP's credit measures to remain broadly unchanged, with debt/EBITDA near or about 4.5x in 2013. However, we still expected it to be elevated in 2012 at about 4.75x. ETP's greater size and cash flow diversity, however, makes it more resilient to commodity price risk or pressure from any one of its business lines. ETP's ability to maintain debt leverage at this level depends on industry conditions and management's ability to integrate the assets and realize synergies. In our view, however, the ETE family of companies continues to pursue a highly aggressive growth strategy, which often results in weak credit measures, particularly when we view them on a trailing 12-month basis. At the same time, we recognize that the company has been willing to issue equity and fund transactions in such a way as to preserve the current ratings. The new ETP will have greater asset and geographic diversity with the following business lines: -- Intrastate natural gas pipelines (about 26% of pro forma cash flow), -- Interstate natural gas pipelines (25%), -- Crude oil and refined products (20%), -- Midstream and NGLs (19%), and -- Retail (10%). ETP previously had high exposure to natural gas prices and commodity price differentials. With the recent Louis Dreyfus acquisition and the pending Sunoco purchase, the partnership will now have more exposure to NGLs and crude oil infrastructure, which, given the pricing disparity between NGLs and natural gas, should serve the partnership well in coming years. CreditWatch We expect to resolve the positive CreditWatch on Sunoco and the negative CreditWatch on Sunoco Logistics when the transaction is complete in the third or fourth quarter of 2012. We have reviewed the transaction and expect to raise Sunoco's corporate credit rating to 'BBB-' and lower Sunoco Logistics' corporate credit rating to 'BBB-', both in line with that of ETP. Outlook Energy Transfer Partners The stable outlook on our rating for ETP reflects our expectation that its debt/EBITDA will be near or about 4.5x in the long term because we expect the company's more diversified mix of assets can tolerate somewhat higher debt leverage for the rating than currently. We also expect the partnership to manage and finance its capital spending program while keeping an adequate liquidity position. We could lower the rating if it appears that ETP will sustain its debt to EBITDA ratio at or above 4.75x. We do not currently contemplate a higher rating unless there is sustained improvement in credit measures. Specifically, ETP would need to maintain debt to EBITDA below 4x to 4.25x for a sustained period to warrant an upgrade. Energy Transfer Equity The stable rating outlook on ETE reflects our expectation for continued stability in the distribution payments it receives from its ownership interests in ETP, Southern Union Gas Co., and Regency Energy Partners L.P.. We expect ETE to slightly deleverage its balance sheet following the Southern Union transaction, with stand-alone and consolidated debt to EBITDA of roughly 3.5x and 5.5x, respectively. However, we expect debt leverage to improve further when the Sunoco transaction is complete. We could lower the ratings on ETE if it sustains its stand-alone or consolidated debt to EBITDA ratios above 4x and 6x, respectively, or if it pursues large acquisitions that do not improve its business risk or consolidated cash flow profile. A downgrade of ETP would not necessarily lead to a lower rating on ETE unless we believe there is a greater risk that distributions to ETE will decrease. We are not contemplating higher ratings on ETE, absent a materially more conservative financial policy. Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List Ratings Affirmed; Outlook Revised To From Energy Transfer Partners L.P. Corporate credit rating BBB-/Stable/-- BBB-/Negative Senior unsecured BBB- Ratings Affirmed Energy Transfer Equity L.P. Corporate credit rating BB/Stable/-- Senior secured BB Recovery rating 3 Ratings Placed On CreditWatch Sunoco Inc. Corporate credit rating BB+/Watch Pos/-- BB+/Stable/-- Senior unsecured BB+ Recovery rating 4 Sunoco Logistics Partners L.P. Corporate credit rating BBB/Watch Neg/-- BBB/Stable/-- Sunoco Logistics Partners Operations L.P. Corporate credit rating BBB/Watch Neg/-- BBB/Stable/-- Senior unsecured BBB/Watch Neg BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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