TEXT-S&P Affirms Ratings On Energy Transfer Partners

Mon Jun 18, 2012 6:56pm EDT

Overview

-- U.S. midstream energy master limited partnership Energy Transfer Partners (ETP) announced plans to form a new ETP-controlled company that will include Southern Union Co. and assets to be acquired in the recently announced merger with Sunoco Inc.

-- We are affirming our 'BBB-' corporate credit ratings on ETP and Southern Union and maintaining their stable outlooks

. -- We are affirming our 'BB' corporate credit rating on Energy Transfer Equity L.P. (ETE) and maintaining the stable outlook. We maintained ETE's senior secured recovery rating at '3', but will review and likely change it to a '4' when the transaction is complete. However, we would still rate ETE's senior secured notes in line with its corporate credit rating of 'BB'.

-- We are revising the CreditWatch implications on the 'BB+' corporate credit rating on Sunoco Inc. to negative from positive. We are maintaining Sunoco Logistics Partners' 'BBB' corporate credit rating on CreditWatch with negative implications.

-- 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.

Rating Action On June 18, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' corporate credit ratings on Energy Transfer Partners L.P. (ETP) and Southern Union Co. and maintained their stable outlooks. We are affirming our 'BB' corporate credit rating on Energy Transfer Equity L.P. (ETE) and maintaining the stable outlook. We revised the CreditWatch implications on the 'BB+' corporate credit rating on Sunoco Inc. to negative from positive.

We maintained the negative CreditWatch implications on Sunoco Logistics Partners L.P.'s 'BBB' corporate credit rating. As of March 31 2012, ETP had nearly $9 billion of balance-sheet debt. Rationale We have reviewed the transaction and believe the formation of a new company called ETP HoldCo Corp. (ETP HoldCo), which will hold Sunoco Inc. and Southern Union, is broadly neutral to positive for ETP's credit risk profile.

ETP HoldCo will sit underneath and be controlled by ETP through a majority of board seats and voting rights embedded in its 40% common share interest. The transaction will cause ETP's EBITDA base to grow materially to about $4 billion, with its overall cash flow diversity notably improving. The transaction does, however, further entrench ETP's aggressive growth strategy and that of the ETE family of companies as a whole. The Sunoco Inc. acquisition will extend ETP's scale and enhance its competitive position across the natural gas, oil, and natural gas liquids value chain.

The addition of Southern Union would bring additional diversity and scale to ETP, although Southern Union will still ultimately exist under ETE, so there is no notable change in our view of ETE on a consolidated basis. ETE will maintain its general partnership role over the entire ETE family of companies so we expect it to ultimately control all of its subsidiaries. We link the ratings on ETE and ETP 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 slightly improve, with debt/EBITDA at roughly 4x to 4.5x in 2013, which we deem as appropriate for the rating. However, we still expect 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 ratings affirmation on Southern Union as well as the CreditWatch listing on Sunoco Logistics reflects our expectation that their corporate credit ratings will be in line with that of ETP. ETP's management will exert a significant amount of control over both companies.

The CreditWatch listing on Sunoco Inc. reflects our expectation that its corporate credit ratings could be lower than its current rating of 'BB+' as we consider it to be a weak subsidiary of ETP. We feel Sunoco Inc.'s stand-alone credit quality does not warrant a 'BBB-' rating and ETP may not view it as strategic in the long-term. The rating and outlook on ETE are not affected because its consolidated credit profile does not meaningfully change. We expect ETE's credit metrics will remain appropriate for the rating, with stand-alone debt/EBITDA of about 3.5x in 2013 (versus previous expectations of 3.75x) and consolidated debt/EBITDA to be about 5.25x in 2013 (versus previous expectations of about 5.5x).

Although ETE's debt leverage measures will improve slightly, it will now receive cash flows produced by Southern Union via subordinated distributions through its 60% interest in ETP HoldCo (controlled by ETP) as opposed to it being a direct subsidiary. Absent direct ownership of hard assets, our default scenario and the resulting valuation become less certain. As a result, we would revert to a more conservative valuation, which is consistent with how we look at peers whose sole assets consist of partially owned equity interests in other entities. As such, we expect to change ETE's recovery rating to a '4' from a '3' when the transaction closes.

However, we would still rate ETE's senior secured notes in line with its corporate credit rating of 'BB'. CreditWatch We expect to resolve the negative CreditWatch on Sunoco Logistics when the transaction is completed in the third or fourth quarter of 2012. We have reviewed the transaction and expect to lower Sunoco Logistics' corporate credit rating to 'BBB-', in line with that of ETP. We expect to resolve the negative CreditWatch on Sunoco Inc. when the transaction is complete in the third or fourth quarter of 2012. We believe Sunoco Inc.'s corporate credit rating could be lower than its current rating of 'BB+' as we could consider it to be a weak subsidiary of ETP.

We will assess the entity's stand-alone credit profile and its strategic importance to 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, and Regency Energy Partners L.P.. We expect ETE to deleverage its balance sheet, with stand-alone and consolidated debt to EBITDA of about 3.5x and 5.25x, respectively, in 2013.

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. Southern Union Co. Our stable rating outlook on Southern Union reflects our view that the company will continue to reduce financial leverage, maintain adequate liquidity, and execute its organic growth strategy, principally related to its gathering and processing business segment.

At this time, we consider an upgrade unlikely because of Southern Union's ownership by ETE and ultimately an entity controlled by ETP. Our ratings on ETP and ETE could influence our ratings on Southern Union as they will ultimately control Southern Union and have significant influence over its financial policies. A downgrade of ETP would likely result in a lower rating on Southern Union. Related Criteria And Research Key

Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012

Ratings List Ratings Affirmed Energy Transfer Partners L.P. Corporate credit rating BBB-/Stable/-- Senior unsecured BBB- Energy Transfer Equity L.P. Corporate credit rating BB/Stable/-- Senior secured BB Recovery rating 3 Southern Union Co. Corporate credit rating BBB-/Stable/-- Senior Unsecured BBB- Junior Subordinated BB Ratings Remaining On CreditWatch Sunoco Logistics Partners L.P. Corporate credit rating BBB/Watch Neg/-- Senior unsecured BBB/Watch Neg CreditWatch Listing Revised To From Sunoco Inc. Corporate credit rating BB+/Watch Neg/-- BB+/Watch Pos/-- Senior unsecured BB+/Watch Neg BB+/Watch Pos Recovery rating 4

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