-- U.S. midstream energy partnership Regency Energy Partners L.P.
(BB/Stable/--) intends to issue $500 million of senior unsecured notes.
-- We are assigning our 'BB' rating to the notes, proceeds of which the
partnership will use to repay borrowings outstanding on its revolving credit
-- We base the stable rating outlook on our view that the partnership's
larger cash flow contribution from its pipeline joint-venture interests should
continue to lower financial leverage through 2012.
On Sept. 27, 2012, Standard & Poor's Ratings Services assigned its 'BB' senior
unsecured rating and '4' recovery rating on U.S. midstream energy partnership
Regency Energy Partners L.P.'s and Regency Energy Finance Corp.'s issuance of
$500 million senior unsecured notes. The partnership will use proceeds from
the notes to repay borrowings outstanding on its revolving credit facility.
The outlook is stable.
Standard & Poor's ratings on U.S. midstream energy partnership Regency reflect
its "fair" business risk profile and "aggressive" financial risk profile under
our criteria. Some commodity price sensitivity, a small, but growing, asset
base, and a diversified business mix with a large fee-based cash flow
component characterize the partnership's fair business risk profile. Moderate
financial leverage, an aggressive growth strategy, and the master limited
partnership (MLP) structure result in an aggressive financial profile, in our
view. Energy Transfer Equity L.P. owns the 2% general partner and 15% limited
partner interest in Regency.
Regency's aggressive financial risk profile reflects our expectation for
financial leverage in the mid-4x area (partnership debt to EBITDA plus
joint-venture distributions), a significant capital spending program, and weak
distribution coverage at just under 1x in 2012. Under our base-case forecast,
we assume a modest cash flow decline in the transportation segment related to
lower throughput (about 5%) on the Regency Intrastate Gas System (RIGS), a
growing cash flow contribution from the gathering and processing and Natural
Gas Liquids (NGL) Logistics segment, relatively flat cash flows from the
contract services segment, and used Standard & Poor's NGL price deck for
unhedged NGL prices. We forecast Regency will generate between $450 million
and $475 million of EBITDA and have about $2.2 billion of total debt by
year-end 2012. We expect the partnership's distribution coverage to be weak at
about 1x, given the cash flow lag from organic projects.
We include 100% of Regency's convertible preferred equity as debt in our
calculations because it does not receive equity credit under our hybrid
security criteria. Our financial ratios also treat the interests in the
pipeline assets and Lone Star joint venture on an unconsolidated basis; i.e.,
we do not include the debt and only consider the upstream dividends in EBITDA.
If we were to proportionately consolidate the debt and the cash flow at the
joint ventures, we would expect debt to EBITDA of about 5.25x in 2012.
Regency's gathering and processing business accounts for just under 40% of
total margin and carries the most risk in our view, because a portion of the
cash flows fluctuate with changes in commodity prices. The partnership
typically hedges a meaningful percentage of this risk in the near term, and
the percentage hedged declines over 24 months. Regency processes most of its
gas under fee-based and percentage-of-proceeds contracts, although it does
have some keep-whole contracts in the Mid-Continent and West Texas regions.
Volumetric risk exists in the gathering businesses when commodity prices are
low. Producers could slow drilling, which would curtail cash flows. We
estimate that about 8% of Regency's 2012 segment margin is subject to changes
in commodity prices. When excluding hedging, this percentage increases to
We view Regency's joint-venture interests in RIGS and Midcontinent Express
Pipeline LLC (MEP), which accounts for about 30% of gross margin, favorably
due to the very stable cash flow stream that long-term, firm "take-or-pay"
demand contracts generate. The structure of these shipper contracts makes the
pipeline's cash flows immune to changes in throughput. The RIGS joint venture
and MEP ownership interest enhance Regency's business risk profile by adding
geographic and asset diversity to the partnership's portfolio. However, we
view the average shippers' credit quality of 'BB' on RIGS and MEP as somewhat
weak, which partially offsets the assets' strengths. In addition, Regency
creditors only benefit from upstream dividends from these assets. There is
substantial debt at MEP (see the research update on MEP, published July 30,
We believe ETP-Regency Midstream Holdings LLC, the joint venture which owns
the LDH Energy Asset Holdings LLC (LDH) assets, will reinvest most of the net
cash flow generated from the LDH assets into organic growth projects rather
than distribute it to the partnerships in 2012. We estimate that Regency's 30%
interest in the Lone Star joint venture could account for about 10% of total
margin but about 50% of growth capital (Regency estimates its total growth
capital spending will be about $800 million in 2012). The growth projects,
such as the West Texas gateway pipeline and additional fractionation capacity,
get support from fee-based, long-term contracts.
We view the contract services business as supportive of credit because its
fee-based cash flow has been fairly resilient even when rig counts decline.
This segment, which we estimate accounts for 25% of total margin, provides
compression and treating services to oil and gas producers and gives Regency
some business and geographic diversity into the emerging shale plays.
We consider Regency's liquidity to be "adequate" under our corporate liquidity
methodology. We have assumed sources of liquidity divided by uses of about
1.2x during the next 12 months. Primary sources of liquidity include our
assumptions for funds from operations of $375 million and revolving credit
facility availability of $635 million. Regency upsized its revolving credit
facility due June 15, 2014 to $1.15 billion effective Sept. 6, 2012. We have
assumed that Regency's main uses of cash for the next 12 months will include
maintenance and growth capital spending of about $800 million and
distributions of about $320 million. A key assumption underlying our
assessment of Regency's liquidity is that we would expect the partnership to
scale back its discretionary capital spending and/or distributions if it
couldn't generate or obtain sufficient funding to support its growth plans.
Regency has no near-term debt maturities.
The revolving credit facility requires Regency to maintain a total debt to
EBITDA ratio below 5.25x, senior debt to EBITDA below 3x, and EBITDA interest
coverage above 2.75x, with adjustments for material projects and joint
ventures. As of June 30, 2012, the partnership was in compliance with these
covenants, with an EBITDA cushion of about 30% for the total leverage
covenant. EBITDA includes pro forma credit for recently completed projects.
The rating on Regency's unsecured debt is 'BB' (the same as the corporate
credit rating) and the recovery rating on this unsecured debt is '4',
indicating our expectation that lenders would receive average (30% to 50%)
recovery if a payment default occurs. For the full recovery analysis, see the
recovery report on Regency published June 4, 2012.
The stable rating outlook reflects our view that the partnership's larger cash
flow contribution from its pipeline joint-venture interests should continue to
lower financial leverage through 2012. In our opinion, higher ratings are
possible over the longer term if Regency maintains total adjusted debt to
EBITDA at or below 4x (partnership debt to EBITDA plus joint-venture
distributions), and increases the cash flow it receives not only from its
stable pipeline joint-venture interests but also from fee-based organic
projects at the partnership level. We could lower the rating if the
partnership's cash financial leverage approaches 4.75x and we do not see a
clear path for improvement.
Related Criteria And Research
-- 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
Regency Energy Partners L.P.
Corp. credit rating BB/Stable/--
Regency Energy Partners L.P.
Regency Energy Finance Corp.
$500 mil. senior unsecured notes BB
Recovery rating 4