Jan 14 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
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-