Jan 14 (Reuters) - Standard & Poor’s Ratings Services assigned its ‘BBB-’ rating to Energy Transfer Partners L.P.’s proposed $1 billion senior unsecured note issuance. The partnership will use the proceeds from the notes to repay borrowings outstanding on its revolving credit facility. The outlook on the rating is stable. Pro forma for the debt issuance, ETP and its immediate subsidiaries will have about $9.5 billion of reported debt. ETP is also a co-obligor on $965 million of notes issued by Sunoco Inc.
Standard & Poor’s rating on Energy Transfer Partners L.P. reflects the strong competitive position of its energy pipeline, processing, and storage businesses; its increasing scale and diversity; and the stability of its mostly fee-based cash flows. Somewhat offsetting these strengths are weak performance at its intrastate natural gas business; weak distribution coverage; elevated financial leverage, which includes the debt at its general partner and parent company, Energy Transfer Equity L.P. (ETE); and its aggressive growth strategy.
ETP’s “strong” business risk profile under our criteria reflects its competitive market position in its natural gas pipeline, processing, and storage businesses, and its generally stable cash flow base. We believe the acquisition of Sunoco Inc. and formation of ETP HoldCo Corp., which holds Sunoco Inc. and Southern Union Co., is broadly neutral to positive for ETP’s credit risk profile. ETP’s EBITDA base will grow materially to about $4 billion, with its overall cash flow diversity improving notably. The Sunoco acquisition also extends ETP’s scale and enhances its competitive position across the natural gas, crude oil, refined products, and natural gas liquids value chain, with Southern Union adding additional diversity and scale to ETP. The contribution from ETP’s challenged intrastate natural gas business is expected to notably decrease and be replaced by Sunoco’s more stable crude oil and refined products transportation assets. ETP also now has greater asset and geographic diversity with the following business lines: Intrastate natural gas pipelines (about 17% of pro forma 2013 EBITDA), interstate natural gas pipelines (35%), crude oil and refined products (24%), midstream and natural gas liquids (NGLs, 20%), and retail (4%). The transactions do, however, further entrench ETP’s aggressive growth strategy and that of the ETE family of companies as a whole.
ETP’s aggressive financial risk profile reflects its elevated financial leverage; the master limited partnership (MLP) structure, which strongly motivates ETP to distribute nearly all cash flow (after maintenance capital spending) to unitholders every quarter; and its relationship with ETE, which introduces greater leverage into the partnership’s consolidated credit profile. ETP’s increasing size and cash flow diversity, however, makes it more resilient to commodity price risk or pressure from any one of its business lines. In our view, however, the ETE family of companies pursues a highly aggressive growth strategy, which at times results in weak credit measures. At the same time, we recognize that ETP is willing to issue equity and fund transactions in such a way as to preserve ratings.
We expect ETP’s credit measures to slightly improve, with a debt to EBITDA ratio between 4x and to 4.5x in 2013, which we deem appropriate for the rating. However, we expect leverage to be elevated for year-end 2012 at about 4.75x 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 (IDR) 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 2013, and solid NGL transportation and production growth occur due mainly to new assets and acquisitions. We expect distribution coverage to be weak at slightly less than 1x for year-end 2012 and potentially back to about 1x in 2013.
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 Co. and Sunoco Logistics Partners L.P.) because the management teams and boards of directors overlap and ETE can significantly influence the companies’ business activities and financial policies. Although ETE’s debt leverage measures will improve slightly, it will now receive cash flows produced by Southern Union. via subordinated distributions rather than it being a direct subsidiary. We expect ETE’s stand-alone 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.
We view liquidity as “adequate” at ETP, inclusive of the ETP HoldCo level. We also view liquidity at ETE, Sunoco, and SUG as adequate. For the upcoming 12 months and pro forma for the debt issuance, we expect ETP’s liquidity sources to exceed uses by about 1.4x. Cash sources consist of projected funds from operations (FFO) of at least $3 billion and availability of about $2.5 billion on ETP, Sunoco, and Southern Union’s revolving credit facilities pro forma for the debt issuance. ETP’s unrestricted cash was about $314 million as of Dec.. 31, 2012. We expect cash uses for ETP, Sunoco, and Southern Union to include maintenance and long lead time projects of at least $1.5 billion (but total spending may likely be notably higher due 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 of less than 5x; ETP’s actual figure was about 4.33x as of Sept. 30, 2012.
ETP’s liquidity and cash generation are adequate to fund its operations and maintenance capital spending requirements and 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.
The stable outlook on ETP reflects our expectation that its debt to EBITDA ratio 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 4.75x or more. We do not currently contemplate a higher rating unless the partnership notably improves its credit measures. Specifically, ETP would need to maintain debt to EBITDA at less than 4x for a sustained period to warrant an upgrade.
Related Criteria And Research
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012
Temporary contact numbers: William Ferara 917-557-1292; Michael Grande 609-240-3731;
Energy Transfer Partners L.P.
Corporate credit rating BBB-/Stable/--
Senior unsecured Notes due 2023 BBB-
Notes due 2043 BBB-