UPDATE 2-China's reforms not enough to arrest mounting debt - Moody's
* China facing dilemma of deleveraging without hurting growth
Overview -- Sunoco Logistics Partners Operations L.P., a wholly owned subsidiary of Sunoco Logistics Partners L.P. (SXL), plans to issue senior unsecured notes due 2023 and 2043. -- We expect the partnership to use the proceeds to repay SXL's revolving credit facility balances and for general partnership purposes, including partly financing 2013 expansion capital spending. -- We are assigning our 'BBB-' rating to the proposed note issuance. -- Our stable rating outlook on Sunoco Logistics Partners reflects our outlook on its parent, Energy Transfer Partners L.P. (ETP). We expect Sunoco Logistics will continue to aggressively build out its organic growth projects, principally related to its crude oil pipeline business segment. Rating Action On Jan. 7, 2013, Standard & Poor's Ratings Services assigned its 'BBB-' rating to the proposed senior note issuance of Sunoco Logistics Partners Operations L.P., a wholly owned subsidiary of Philadelphia-based "here &sid=881773&sind=A&" SXL will fully and unconditionally guarantee the notes. We expect the partnership to use the proceeds to repay SXL's revolving credit facility balances and for general partnership purposes, including partly financing 2013 capital spending. The outlook on the rating is stable. Pro forma for the debt issuance, SXL will have slightly more than $2 billion of balance-sheet debt. Rationale The rating on SXL is linked with that of Energy Transfer Partners L.P. (BBB-/Stable/--), reflecting the significant amount of control ETP's management can exert over SXL, given its role as general partner. ETP can significantly influence SXL's business activities and financial policies, including setting distribution levels. Absent ownership constraints, SXL's stand-alone credit profile is slightly higher at 'BBB'.SXL's stand-alone credit quality is influenced by the stable cash flows that it generates from its pipeline and terminal assets and the entity's moderate financial leverage. Partly offsetting these strengths is the partnership's market-related business activities that can add volatility to cash flows. SXL owns about 8,000 miles of crude oil and refined products pipelines and 42 active refined product terminals and has 23 million barrels of crude oil storage capacity. SXL's core pipeline and terminal operations generate consistent cash flow under most industry conditions. The partnership does, however, use some of its own storage assets during contango markets (i.e., when the spot price of oil is lower than the futures price) to generate additional cash flow. Although these activities are working-capital intensive, they do not involve much risk. However, they may not be repeatable, because market conditions frequently change. In our 2013 base case forecast, we assume the crude-oil acquisition and marketing business segment will account for about 25% of EBITDA. These include market-related activities such as contango storage and accounted for about 30% of the partnership's consolidated EBITDA in 2012. Like most midstream energy master limited partnerships, SXL's growth has stemmed from a combination of acquisitions and organic growth projects. In 2013, we have assumed SXL will spend about $700 million (excluding acquisitions) of expansion capital, primarily to expand its crude transportation business in West Texas (namely the Permian); its Marcellus-based Mariner West and East NGL takeaway pipelines; a refined products pipeline from the Midwest to Pennsylvania; and its butane blending business. SXL's financial ratios are solid due to increasing cash flows from new projects and the performance of its crude oil acquisition and marketing business. Under our base case forecast, we assume modest throughput growth for SXL's refined products and crude oil pipelines and an increase of about 5% in throughput for the terminal facilities segment. For 2013, we expect SXL to have financial leverage of about 3x to 3.25x and EBITDA interest coverage between 5x and 6x. We discount the future benefit to cash flow from contango activities in our base case forecast. Our forecast financial ratios exclude any working-capital debt or EBITDA associated with such additional market-related opportunities. We believe distribution coverage could be robust in 2013 at 1.5x or higher (we expect roughly 2x for year-end 2012) due to higher cash flows from the partnership's expansion projects and market-related contango activities. For our latest view on SXL's general partner, Energy Transfer Partners, see the research update published Oct. 8, 2012, on RatingsDirect. Liquidity We assess SXL's liquidity as adequate, with sources divided by uses of at least 1.3x for the next 12 months pro forma for the note issuance. Our assumptions for cash sources include funds from operations of about $600 million; proceeds from the bond issuance; and availability of $254 million as of Sept. 30, 2012, under its $350 million credit facility due in August 2016. We do not include SXL's $200 million, 364-day facility due in August 2013 in our liquidity analysis. Our assumptions for cash uses include total capital spending of about $700 million, about $250 million of distributions, and $50 million in market-related contango opportunities. The partnership has no near-term debt maturities. As of Sept. 30, 2012, SXL was in compliance with the leverage covenant (3.24x actual compared with the maximum level of 5x) under its credit agreements. The maximum leverage under the $350 million five-year and $200 million 364-day credit facilities is 5x and 5.5x during acquisition periods. We expect SXL to remain in compliance with these covenants, as the partnership has a significant EBITDA cushion of about 50% before it trips its more restrictive 5x leverage covenant. Outlook 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 Energy Transfer Equity L.P. 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 -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Temporary contact numbers: Michael Grande 609-240-3731; William Ferara 917-557-1292 Ratings List "here &sid=881773&sind=A&" Corporate credit rating BBB-/Stable/-- New Ratings Senior unsecured Notes due 2023 BBB- Notes due 2043 BBB-
* China facing dilemma of deleveraging without hurting growth
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