Feb 28 - Fitch Ratings has affirmed Regency Energy Partners, LP's
(RGP) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BB'
following RGP's announced acquisition of Southern Union Gathering Company, LLC
(SUGS). The Rating Outlook is Stable. A full list of ratings is at the end of
RGP announced this morning that it will be acquiring SUGS from Southern Union
Company, a jointly owned affiliate of Energy Transfer Equity, L.P. (ETE; IDR
'BB-') and Energy Transfer Partners, L.P. (ETP; IDR 'BBB-') for $1.5 billion.
The transaction will be financed with $900 million in new Regency units issued
to Southern Union Company comprised of $750 million of new common units and $150
million of new class F common units. The class F common units will be equivalent
to common units except will not receive distributions for the equivalent of
eight consecutive quarters post-closing. The remaining $600 million will be paid
in cash funded from long-term borrowings.
KEY RATINGS DRIVERS
Increased Size/Scale: The acquisition of the SUGS assets helps RGP to increase
the size and scale of its gathering and processing operations, with a beneficial
focus on the Permian basin. SUGS's operations are generally moderate risk and
will increase RGP's presence in the Permian basin where production and the need
for gathering and processing services is expected grow. Additionally, SUGS
provides decent organic growth opportunities for RGP with two large scale
projects currently under construction.
Balanced Funding/Owner Support: The balanced financing of the acquisition (60%
equity/40% debt) and the support that ETE is providing by forgoing some of their
incentive distribution rights (IDRs) and their $10 million management fee for
two years, helps the deal be accretive to earnings.
Increased Commodity Price Exposure: The affirmation considers that RGP will be
increasing its commodity price exposure as a result of the transaction. With
SUGS, RGP will be increasing both the size of its gathering and processing
operations and its contribution to EBITDA, which should raise its sensitivity to
changes in commodity prices. However, Fitch expects RGP will hedge its open
commodity exposure, consistent with current practices.
Increased Initial Leverage: At deal close, Fitch expects RGP's leverage to move
higher relative to Fitch's prior expectations but remain within expectations for
the ratings category and comparable to similarly rated peers. Fitch expects
RGP's debt-to-adjusted EBITDA to be roughly 5.9x for 2013 (assuming a second
quarter close and a 50% equity credit for RGP's preferreds) pro forma for the
transaction, and 4.0x-4.5x for 2014. This is compared to Fitch's prior
expectations of between 4.0x-4.25x and below 4.0x for 2013 and 2014
respectively. Should leverage remain elevated above 4.5x for a sustained time
period Fitch would consider a negative ratings action. Fitch typically adjusts
EBITDA to exclude nonrecurring extraordinary items, and noncash mark-to-market
earnings. Adjusted EBITDA excludes equity in earnings and includes dividends
from unconsolidated affiliates.
JV/Structural Subordination: RGP is the owner of several joint venture (JV)
interests some of which have external debt. RGP is structurally subordinate to
the cash operating and debt service needs of these JVs and reliant on JV
distributions to fund its capital spending and its own distributions. This
transaction should help to reduce the percentage of cash flow RGP receives from
non-consolidated JVs on an overall basis.
General Partner Relationship: While Fitch's ratings are largely reflective of
RGP's credit profile on a stand-alone basis, they also consider the company's
relationship with ETE, the owner of its general partner interest. ETE's general
partner interest gives it significant control over the MLP's operations,
including most major strategic decisions such as investment plans, and
management of daily operations. The relationship has also provided investment
opportunities that might otherwise be unavailable to RGP, such as this current
Adequate Liquidity: RGP's liquidity is adequate with roughly $1 billion in
availability under its $1.15 billion revolving credit facility at Dec. 31, 2012.
The revolving credit facility contains financial covenants requiring RGP and its
subsidiaries to maintain a debt to consolidated EBITDA ratio (as defined in the
credit agreement - includes JV and material projects pro forma EBITDA)of less
than 5.25x, consolidated EBITDA to consolidated interest expense ratio greater
than 2.75x and a secured debt to consolidated EBITDA ratio of less than 3.0x.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--Continued large-scale capital expenditures funded by higher than expected debt
--A failure to hedge open commodity price exposure.
--Significant and prolonged decline in prices for NGLs, crude and natural gas;
--Aggressive growth of distributions at RGP.
--Debt/Adj. EBITDA above the 4.5x to 5.0x range and distribution coverage below
1.0x on a sustained basis.
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
--A material improvement in credit metrics with sustained leverage at 4.0x or
Fitch has affirmed the following ratings:
--Long-term IDR 'BB';
--Senior secured revolver 'BB+';
--Senior unsecured notes 'BB';
--Series A preferred units 'B+'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis', Dec. 13, 2012;
--'The Top Ten Differences Between MLP and Corporate Issuers' Feb. 19, 2013;
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012;
--'2013 Outlook: Crude Oil and Refined Products Pipelines' Nov. 29, 2012;
--Eagle Ford Shale Report - Economics Driving Growth' Oct. 15, 2012;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and
Opportunities' June 10, 2012.
Applicable Criteria and Related Research
The Top Ten Differences Between MLP and Corporate Issuers
2013 Outlook: Natural Gas Pipelines & MLPs
2013 Outlook: Midstream Services and MLPs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
2013 Outlook: Crude Oil and Refined Products Pipelines
Eagle Ford Shale Report (Midstream and Pipeline Sector - Economics Driving
Marcellus Shale Report: Midstream and Pipeline Sector --