TEXT-S&P takes rating actions on Energy Transfer Partners/Sunoco
Overview -- U.S. midstream energy master limited partnership Energy Transfer Partners L.P. (ETP) completed its agreement to purchase Sunoco Inc. (Sunoco) for $5.3 billion. In addition, ETP completed the formation of a new ETP-controlled company called ETP HoldCo Corp. that will include Southern Union Co. (SUG) and Sunoco"here 102235&sid=977434&sind=A&" -- We affirmed our 'BBB-' corporate credit ratings on ETP, SUG, and Panhandle Eastern Pipe Line Co. L.P. and maintained the stable outlooks. -- We lowered our rating on Sunoco Logistics Partners L.P. to 'BBB-' from 'BBB', in line with our rating on ETP, and removed the rating from CreditWatch with negative implications. -- We affirmed our 'BB+' corporate credit rating on Sunoco and removed the rating from CreditWatch; we subsequently withdraw the rating at the company's request. We also raised our ratings on Sunoco's senior unsecured notes to 'BBB-' from 'BB+' because ETP is now a co-obligor on these debt obligations. -- We affirmed our 'BB' corporate credit rating on Energy Transfer Equity L.P. and maintained the stable outlook. -- The stable outlook on our rating for ETP reflects our expectation that its debt to EBITDA will be sustained at about 4.5x. Rating Action On Oct. 8, 2012, Standard & Poor's Ratings Services took various rating actions as a result of the completion of the Energy Transfer Partners L.P./Sunoco Inc. purchase agreement: -- We affirmed our 'BBB-' corporate credit ratings on Energy Transfer Partners L.P. (ETP), Southern Union Co. (SUG), and Panhandle Eastern Pipe Line Co. L.P. and maintained stable outlooks on the companies. -- We affirmed our 'BB' corporate credit rating on Energy Transfer Equity L.P. (ETE) and maintained its stable outlook. We also changed the recovery rating on ETE's senior secured debt to '4' from '3' (indicating expectations of average [30% to 50%] recovery if a payment default occurs), but rate ETE's senior secured notes in line with the corporate credit rating of 'BB'. -- We affirmed our 'BB+' corporate credit rating on Sunoco Inc. and removed the rating from CreditWatch. The rating was originally placed on CreditWatch with positive implications on April 30, 2012, and the CreditWatch implications were revised to negative on June 18, 2012. We subsequently withdraw the rating at the company's request. We also raised our ratings on Sunoco's senior unsecured notes to 'BBB-' from 'BB+' because ETP is now a co-obligor on Sunoco's debt obligations. -- We lowered our rating Sunoco Logistics Partners L.P.'s (SXL) to 'BBB-' from 'BBB' and removed it from CreditWatch, where it was placed with negative implications on April 30, 2012. As of June 30, 2012, the ETE family of companies (including ETP, SUN, SXL, SUG, and Regency Energy Partners L.P.) had about $20 billion of balance-sheet debt. Rationale We believe the acquisition of Sunoco and formation of a new company entitled ETP HoldCo Corp., which will hold Sunoco Inc. and Southern Union, is broadly neutral to positive for ETP's credit risk profile. The transaction will cause ETP's EBITDA base to grow materially to about $4 billion, with its overall cash flow diversity notably improving. The transactions do, however, further entrench ETP's aggressive growth strategy and that of the ETE family of companies as a whole. The Sunoco acquisition will extend ETP's scale and enhance its competitive position across the natural gas, oil, and natural gas liquids value chain, with the addition of Southern Union bringing additional diversity and scale to ETP. We expect ETP's credit measures to slightly improve, with debt to EBITDA at about 4x to 4.5x in 2013, which we deem as appropriate for the rating. However, we expect it to be elevated in 2012 at about 4.75x, with debt to EBITDA 5.1x for the trailing-12-months ended June 30, 2012 (in July 2012 ETP issued $670 million of equity which could improve this ratio by about 0.35x if proceeds are fully used to repay debt). ETP's greater size and cash flow diversity 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 projected levels, however, depends on industry conditions and management's ability to integrate the assets and realize synergies. Sustained weakness in the intrastate transportation business and natural gas prices, as well as any pressure on the processing assets from commodity prices, may also affect financial performance. In our base-case forecast scenario, we assume ETP's distribution rate is held flat (but its incentive distribution rights distributions to ETE increase given their equity issuances), unhedged natural gas and NGL prices are assumed at our commodity price decks, ETP's intrastate transportation volumes remain down even though we expect GDP to grow by about 2% in 2012, and solid natural gas liquids (NGL) transportation and production growth occur due mainly to new assets. We expect distribution coverage to be weak at just under 1x in 2012. 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 (and thus Southern Union and SXL) because several members of the management teams and boards of directors overlap and ETE can significantly influence the business activities and financial policies. Although ETE's debt leverage measures will improve slightly, it will now receive cash flows produced by SUG via subordinated distributions as opposed to it being a direct subsidiary. As such, we changed our recovery rating on ETE's senior secured notes to '4' from a '3', which indicates our expectation of average (30% to 50%) recovery if a payment default occurs, though we still rate ETE's senior secured notes in line with the 'BB' corporate credit rating. At the ETE level, we expect debt to EBITDA (defined as distributions from its subsidiaries less general and administrative expenses) to be about 3.5x with consolidated debt to EBITDA of about 5.25x in 2013. Our corporate credit rating on SXL is in line with that of ETP, reflecting the significant amount of control ETP's management will exert over SXL, given its role as general partner. Our senior unsecured rating on Sunoco is in line with that of ETP because ETP is now a co-obligor of Sunoco's debt obligations. We also align our rating on Southern Union with our rating on ETP because it is controlled by ETP via its ownership by ETP HoldCo. Liquidity We view liquidity as "adequate" at ETP, inclusive of the ETP HoldCo level, pro forma for the Sunoco and SUG transactions. We also view liquidity at ETE, Sunoco, and SUG as "adequate". For the upcoming 12 months, we expect ETP's liquidity sources to slightly exceed uses by about 1.4x. Cash sources consist of projected funds from operations (FFO) of at least $3 billion and availability of about $3.5 billion on ETP, Sunoco, and SUG's revolving credit facilities. ETP's unrestricted cash as of June 30, 2012, was about $187 million. We expect cash uses for ETP, Sunoco, and SUG to include maintenance and long-lead time projects of at least $2 billion (though total spending may be notably higher related to discretionary projects), roughly $1.6 billion of unitholder distributions, and $600 million of debt maturities. We expect all companies to remain in compliance with the financial covenants on their revolving credit facilities. For ETP, its financial covenant on its revolving credit facility requires debt to EBITDA below 5x; ETP's actual figure was about 4.39x as of June 30, 2012. ETP's liquidity and cash generation are adequate to fund its operations and maintenance capital spending requirements, and to meet its debt service and distributions. However, ETP must preserve its access to the debt and equity markets to raise funds necessary for growth-oriented capital spending and acquisitions and to maintain its ratings. If EBITDA were to come under pressure, we would expect ETP to curtail its growth-oriented capital spending or use external financing to meet any shortfall, assuming it does not reduce distributions. ETE's stand-alone liquidity is adequate, in our assessment. For the next 12 months, we expect liquidity sources to exceed uses by about 1.2x. Cash sources consist of projected distributions from its subsidiaries of around $1.2 billion less interest expense of about $200 million. Revolving credit facility availability was $190 million as of June 30, 2012. We expect ETE to distribute essentially all of its cash flow to unitholders every quarter. We would expect cash sources relative to uses to remain positive under most scenarios, although it would quickly erode if ETP were to reduce or halt its distributions for any reason. In this event, ETE's liquidity could evaporate quickly, as it maintains only a $200 million revolving credit facility and faces annual interest payments of roughly $200 million, including preferred coupons. Outlook Energy Transfer Partners The stable outlook on ETP reflects our expectation that its debt to EBITDA will be sustained at about 4.5x. 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 the partnership sustains an 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, SUG, and RGP. 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 outlook on Energy Transfer Partners. We expect Southern Union 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 an entity controlled by ETP. Our ratings on ETP and ETE could influence our ratings on Southern Union because these entities 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. Sunoco Logistics Partners Our stable rating outlook on Sunoco Logistics Partners reflects our outlook on Energy Transfer Partners. We expect Sunoco Logistics will continue to aggressively build out its organic growth projects, principally related to its crude oil pipeline business segment. At this time, we consider an upgrade unlikely because of Sunoco Logistics' ownership by ETP. Our ratings on ETP and ETE could influence our ratings on Sunoco Logistics because they will ultimately control Sunoco Logistics and have significant influence over its financial policies. A downgrade of ETP would likely result in a lower rating on Sunoco Logistics. Related Criteria And Research -- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, July 24, 2012 -- Standard & Poor's Revises Its Natural Gas Liquids Price Assumptions For 2012, 2013, And 2014, June 11, 2012 -- 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/-- Southern Union Co. Corporate Credit Rating BBB-/Stable/-- Senior Unsecured BBB- Junior Subordinated BB Panhandle Eastern Pipe Line Co LP Corporate Credit Rating BBB-/Stable/-- Senior Unsecured BBB- Rating Affirmed And Recovery Rating Changed To From Energy Transfer Equity L.P. Senior Secured BB BB Recovery Rating 4 3 Ratings Removed From CreditWatch And Lowered To From Sunoco Logistics Partners L.P. Sunoco Logistics Partners Operations L.P. Corporate Credit Rating BBB-/Stable/-- BBB/Watch Neg/-- Senior Unsecured BBB- BBB/Watch Neg Ratings Affirmed, Removed From CreditWatch, And Withdrawn To From Sunoco Inc. Corporate Credit Rating BB+/Stable/-- BB+/Watch Neg Corporate Credit Rating NR BB+/Stable/-- Recovery Rating NR 4 Ratings Raised Sunoco Inc. Senior Unsecured BBB- BB+/Watch Neg 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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