TEXT-S&P takes rating actions on Energy Transfer Partners/Sunoco

Mon Oct 8, 2012 4:36pm EDT

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 
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     -- 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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