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TEXT-S&P takes actions on Energy Transfer Partners, Sunoco on sale
April 30, 2012 / 6:05 PM / 6 years ago

TEXT-S&P takes actions on Energy Transfer Partners, Sunoco on sale

Overview	
     -- U.S. midstream energy master limited partnership Energy Transfer 	
Partners (ETP) announced an agreement to purchase Sunoco Inc. 
for $5.3 billion. 	
     -- We are affirming our 'BBB-' corporate credit rating on ETP and 	
revising the outlook to stable from negative. 	
     -- We are also placing the 'BB+' corporate credit rating on Sunoco on 	
CreditWatch with positive implications. We are also placing the 'BBB' 	
corporate credit rating on Sunoco Logistics Partners on CreditWatch with 	
negative implications. 	
     -- The stable outlook on our rating for Energy Transfer Partners reflects 	
our expectation that its debt/EBITDA will be near or about 4.5x in the 	
long-term because we expect the company's more diversified mix of assets can 	
tolerate somewhat higher debt leverage for the rating than currently. 	
	
Rating Action	
On April 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 	
corporate credit rating Energy Transfer Partners L.P.'s (ETP) and revised the 	
outlook to stable from negative. We also placed the 'BB+' corporate credit 	
rating on Sunoco Inc. on CreditWatch with positive implications. In addition, 	
we placed the 'BBB' corporate credit rating on Sunoco Logistics Partners L.P. 	
on CreditWatch with negative implications. We affirmed the 'BB' corporate 	
credit rating on Energy Transfer Equity L.P. (ETE) and maintained the stable 	
outlook.	
	
Rationale	
We have reviewed the $5.3 billion transaction and believe it will be slightly 	
positive for ETP's credit risk profile because it is broadly neutral to the 	
company's debt leverage measures. At the same time, it would extend ETP's 	
scale and enhance its competitive position across the natural gas, oil, and 	
natural gas liquids (NGL) value chain. The contribution from ETP's challenged 	
intrastate natural gas business will also notably decrease and be replaced by 	
Sunoco's more stable crude oil and refined products transportation assets. 	
ETP's EBITDA base will grow materially to about $3 billion with its overall 	
cash flow diversity notably improving, too. The transaction does, however, 	
lend further credence to ETP's highly aggressive growth strategy and that of 	
the ETE family of companies as a whole. ETP will fund the purchase with 50% 	
common units and 50% cash. Sunoco's $965 million of debt will remain 	
outstanding.	
	
The CreditWatch listings on Sunoco and Sunoco Logistics reflect our 	
expectation that their corporate credit ratings will be in line with that of 	
ETP. Sunoco will be a wholly owned subsidiary, with ETP's management 	
controlling Sunoco and exerting significant control over Sunoco Logistics, 	
given its role as general partner. ETP will in essence control Sunoco 	
Logistics as its general partner and its role on the company's board of 	
directors. Sunoco Logistics is also ultimately controlled by ETE, through ETP, 	
so we feel its rating is limited to 'BBB-'.	
	
There is no effect on our rating and outlook on ETE. ETE's debt leverage 	
measures will improve slightly given the Sunoco addition. However, the 	
improvement is not sufficient to warrant a higher rating or positive outlook 	
at this time. We expect ETE's credit measures to remain appropriate for the 	
rating. We expect ETE's stand-alone debt/EBITDA to be about 3.5x in 2013 	
versus previous expectations of 3.75x. We also expect ETE's consolidated 	
debt/EBITDA to be just over 5x in 2013 versus previous expectations of about 	
5.5x. 	
	
We link the ratings on ETE and ETP, and ultimately Sunoco and Sunoco 	
Logistics, because several members of the management teams and boards of 	
directors overlap. In addition, ETE can, through its general partner interest, 	
significantly influence the business activities and financial policies, 	
including setting distribution levels. 	
	
We expect ETP's credit measures to remain broadly unchanged, with debt/EBITDA 	
near or about 4.5x in 2013. However, we still expected it to be elevated in 	
2012 at about 4.75x. ETP's greater size and cash flow diversity, however, 	
makes it more resilient to commodity price risk or pressure from any one of 	
its business lines. ETP's ability to maintain debt leverage at this level 	
depends on industry conditions and management's ability to integrate the 	
assets and realize synergies. In our view, however, the ETE family of 	
companies continues to pursue a highly aggressive growth strategy, which often 	
results in weak credit measures, particularly when we view them on a trailing 	
12-month basis. At the same time, we recognize that the company has been 	
willing to issue equity and fund transactions in such a way as to preserve the 	
current ratings. 	
	
The new ETP will have greater asset and geographic diversity with the 	
following business lines: 	
     -- Intrastate natural gas pipelines (about 26% of pro forma cash flow), 	
     -- Interstate natural gas pipelines (25%), 	
     -- Crude oil and refined products (20%),	
     -- Midstream and NGLs (19%), and 	
     -- Retail (10%). 	
	
ETP previously had high exposure to natural gas prices and commodity price 	
differentials. With the recent Louis Dreyfus acquisition and the pending 	
Sunoco purchase, the partnership will now have more exposure to NGLs and crude 	
oil infrastructure, which, given the pricing disparity between NGLs and 	
natural gas, should serve the partnership well in coming years.	
	
CreditWatch	
We expect to resolve the positive CreditWatch on Sunoco and the negative 	
CreditWatch on Sunoco Logistics when the transaction is complete in the third 	
or fourth quarter of 2012. We have reviewed the transaction and expect to 	
raise Sunoco's corporate credit rating to 'BBB-' and lower Sunoco Logistics' 	
corporate credit rating to 'BBB-', both in line with that of ETP.	
	
Outlook	
Energy Transfer Partners	
The stable outlook on our rating for ETP reflects our expectation that its 	
debt/EBITDA will be near or about 4.5x in the long term because we expect the 	
company's more diversified mix of assets can tolerate somewhat higher debt 	
leverage for the rating than currently. 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 or above 4.75x. We do not currently 	
contemplate a higher rating unless there is sustained improvement in credit 	
measures. Specifically, ETP would need to maintain debt to EBITDA below 4x to 	
4.25x for a sustained period to warrant an upgrade. 	
	
Energy Transfer Equity	
The stable rating outlook on ETE reflects our expectation for continued 	
stability in the distribution payments it receives from its ownership 	
interests in ETP, Southern Union Gas Co., and Regency Energy Partners L.P.. We 	
expect ETE to slightly deleverage its balance sheet following the Southern 	
Union transaction, with stand-alone and consolidated debt to EBITDA of roughly 	
3.5x and 5.5x, respectively. However, we expect debt leverage to improve 	
further when the Sunoco transaction is complete. We could lower the ratings on 	
ETE if it sustains its stand-alone or consolidated debt to EBITDA ratios above 	
4x and 6x, respectively, or if it pursues large acquisitions that do not 	
improve its business risk or consolidated cash flow profile. A downgrade of 	
ETP would not necessarily lead to a lower rating on ETE unless we believe 	
there is a greater risk that distributions to ETE will decrease. We are not 	
contemplating higher ratings on ETE, absent a materially more conservative 	
financial policy.	
	
Related Criteria And Research	
Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, 	
April 18, 2012	
	
Ratings List	
Ratings Affirmed; Outlook Revised	
                               To                 From	
Energy Transfer Partners L.P.	
Corporate credit rating        BBB-/Stable/--     BBB-/Negative	
 Senior unsecured              BBB-	
	
Ratings Affirmed	
	
Energy Transfer Equity L.P.	
Corporate credit rating        BB/Stable/--	
 Senior secured                BB	
  Recovery rating              3	
	
Ratings Placed On CreditWatch	
	
Sunoco Inc.	
Corporate credit rating        BB+/Watch Pos/--    BB+/Stable/--	
 Senior unsecured              BB+	
  Recovery rating              4	
	
Sunoco Logistics Partners L.P.	
Corporate credit rating        BBB/Watch Neg/--    BBB/Stable/--	
	
Sunoco Logistics Partners Operations L.P.	
Corporate credit rating        BBB/Watch Neg/--    BBB/Stable/--	
 Senior unsecured              BBB/Watch Neg       BBB	
	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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