TEXT-Fitch affirms Energy Transfer Partners
April 30 - Following the announced acquisition of Sunoco, Inc (SUN) by Energy Transfer Partners, L.P. (ETP), Fitch Ratings has taken the following rating actions: affirmed the Issuer Default Rating (IDR) for Energy Transfer Partners, L.P. (ETP) at 'BBB-' with a Negative Outlook; affirmed the IDR for Sunoco Logistics Partners L.P. (SXL) and, its operating partnership, Sunoco Logistics Partners Operations L.P. (both entities together referred to as Sunoco Logistics) at 'BBB' with a Stable Outlook; and affirmed Sunoco, Inc. (SUN; IDR 'BB+) with a Stable Outlook. Transaction Overview: Approximately $7.9 billion of outstanding ETP long-term debt, $965 million of outstanding SUN long-term debt, and $1.5 billion of Sunoco Logistics long-term debt is affected by today's action. A full list of rating actions follows at the end of this release. In the contemplated transaction, ETP will acquire 100% of SUN's outstanding shares for approximately $50 per share in a transaction valued at $5.3 billion. The transaction and associated fees are to be funded with $2.7 billion of ETP common units, approximately $2 billion of SUN cash, and the remainder drawn under ETP's existing $2.5 billion credit facility. The acquisition will be subject to SUN shareholder vote, HSR, and other regulatory approvals and is expected to close by the fourth quarter of 2012. Post closing SUN will be a 100% owned subsidiary of ETP. SUN owns the 2% general partnership interest, 100% of the incentive distribution rights and a 32.4% limited partner interest in SXL. Rating Rationale for ETP: ETP's rating affirmation considers the benefits of scale and diversity provided by the SUN acquisition. It also recognizes the limited amount of new debt required to complete the transaction and modestly favorable impact on its leverage metrics. The SUN acquisition will change ETP's cash flow mix by adding crude oil, refined products and retail operations. It will expand and enhance the services it can provide to customers. Approximately 29% of estimated 2012 pro forma consolidated cash flow will now come from NGLs, crude oil, and refined products. An additional 10% will come from retail marketing. ETP's Outlook remains Negative, which reflects its aggressive acquisition and organic growth activities, the associated transactional risk, and the impact these activities have on credit metrics. ETP will continue to have significant future financing obligations beyond the SUN purchase including capital contributions to joint ventures. As a result Fitch expects that ETP's debt to EBITDA to remain over 4.0 times (x) through 2013. Fitch affirms the following ratings with a Negative Outlook: Energy Transfer Partners, L.P. --IDR at 'BBB-'; --Senior unsecured debt at 'BBB-'. Rating Rationale for Sunoco Logistics: The affirmed ratings are supported by the fact that Sunoco Logistics will not be impacted from a credit perspective in the near term. It will remain self-funding standalone MLP. Fitch expects that the company will have additional opportunities for growth with ETP as its sponsor given its significant size and scope. Furthermore, Sunoco Logistics will be able to increase its asset diversity and as well as its geographic diversity. Concerns include possible changes such as a more aggressive business strategy or financial practices with the new ownership. Catalysts which could prompt negative rating action include a change in Sunoco Logistics' financial policies such as funding growth with debt which could result in significantly higher leverage. Fitch believes that Sunoco Logistics will maintain conservative financial policies but that they may evolve. Leverage at Sunoco Logistics has been decreasing and adjusting for $250 million of debt maturities in February 2012; it was 2.8x at the end of 2011. This is well below leverage of 3.3x at yearend 2010. Fitch believes leverage will be return to over 3.0x at the end of 2013. Distribution coverage was strong at 1.8x at the end of 2011 and well above 1.3x at the end of the prior year. Fitch believes the current coverage ratio is high and allows for growth in distributions. Rating Rationale for SUN: Sunoco's ratings affirmation is driven by the company's currently high liquidity; solid adjusted leverage metrics; and ongoing transition from a manufacturing to a more ratable, distribution driven business. These factors are balanced by the reduced business diversification following the SunCoke spin-off, chemicals asset sales and pending exit from refining; and the increased structural subordination of debt at the Sunoco parent level to debt at Sunoco Logistics. In February, Sunoco laid out a plan for the strategic use of its cash which included a sizable share repurchase (up to 19.9% of shares outstanding, approximately $800 million); retirement of parent level debt (up to $400 million); the setup of a fund to eliminate environmental remediation liabilities ($200 million-$250 million); prefunding of future retiree medical expenses ($200 million), pension liabilities ($80 million); and an increased dividend ($17 million). While a number of these initiatives have been completed, incremental share buybacks and debt repurchases by Sunoco are expected to be suspended following the acquisition announcement as Sunoco's cash will be a key funding source for this transaction. Sunoco's cash and equivalents at Dec. 31, 2011 totaled $2.06 billion. Potential catalysts for positive ratings actions include additional debt reductions at the Sunoco level; evidence of support for Sunoco's credit profile by ETP; or increases in EBITDA at remaining businesses to support current debt levels. Potential catalysts for future negative ratings actions include a major leveraging transaction. Fitch notes that key covenants in Sunoco's debt restrict the ability of an acquirer to convey all or substantially all of SUN's property to an acquirer. These covenants limit ETP's flexibility to transfer all of SUN's assets within ETP's corporate structure and may provide incentives for ETP to support SUN's credit profile in the future. Fitch affirms the following ratings with a Stable Outlook: Sunoco Logistics Partners L.P. --Long-term IDR at 'BBB'. Sunoco Logistics Partners Operations L.P. --Long-term IDR at 'BBB; --Senior unsecured debt at 'BBB'; --Senior unsecured bank facilities at 'BBB'; --Short-term IDR at 'F2'. Sunoco, Inc. --IDR at 'BB+'; --Senior unsecured debt at 'BB+'; --Senior secured revolver at 'BBB-'.
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