(The following statement was released by the rating agency)Overview
-- U.S. midstream energy master limited partnership Energy TransferPartners L.P.
(ETP) completed its agreement to purchase Sunoco Inc.(Sunoco) for $5.3 billion. In addition, ETP completed the formation of a newETP-controlled company called ETP HoldCo Corp. that will include SouthernUnion Co. (SUG) andSunoco"
-- We affirmed our 'BBB-' corporate credit ratings on ETP, SUG, andPanhandle Eastern Pipe Line Co. L.P. and maintained the stable outlooks.
-- We lowered our rating on Sunoco Logistics Partners L.P. to 'BBB-' from'BBB', in line with our rating on ETP, and removed the rating from CreditWatchwith negative implications.
-- We affirmed our 'BB+' corporate credit rating on Sunoco and removedthe rating from CreditWatch; we subsequently withdraw the rating at thecompany's request. We also raised our ratings on Sunoco's senior unsecurednotes to 'BBB-' from 'BB+' because ETP is now a co-obligor on these debtobligations.
-- We affirmed our 'BB' corporate credit rating on Energy Transfer EquityL.P. and maintained the stable outlook.
-- The stable outlook on our rating for ETP reflects our expectation thatits debt to EBITDA will be sustained at about 4.5x.
Rating ActionOn Oct. 8, 2012, Standard & Poor's Ratings Services took various ratingactions as a result of the completion of the Energy Transfer PartnersL.P./Sunoco Inc. purchase agreement:
-- We affirmed our 'BBB-' corporate credit ratings on Energy TransferPartners L.P. (ETP), Southern Union Co. (SUG), and Panhandle Eastern Pipe LineCo. L.P. and maintained stable outlooks on the companies.
-- We affirmed our 'BB' corporate credit rating on Energy Transfer EquityL.P. (ETE) and maintained its stable outlook. We also changed the recoveryrating on ETE's senior secured debt to '4' from '3' (indicating expectationsof average [30% to 50%] recovery if a payment default occurs), but rate ETE'ssenior secured notes in line with the corporate credit rating of 'BB'.
-- We affirmed our 'BB+' corporate credit rating on Sunoco Inc. andremoved the rating from CreditWatch. The rating was originally placed onCreditWatch with positive implications on April 30, 2012, and the CreditWatchimplications were revised to negative on June 18, 2012. We subsequentlywithdraw the rating at the company's request. We also raised our ratings onSunoco's senior unsecured notes to 'BBB-' from 'BB+' because ETP is now aco-obligor on Sunoco's debt obligations.
-- We lowered our rating Sunoco Logistics Partners L.P.'s (SXL) to 'BBB-'from 'BBB' and removed it from CreditWatch, where it was placed with negativeimplications on April 30, 2012.
As of June 30, 2012, the ETE family of companies (including ETP, SUN, SXL,SUG, and Regency Energy Partners L.P.) had about $20 billion of balance-sheetdebt.
We believe the acquisition of Sunoco and formation of a new company entitledETP HoldCo Corp., which will hold Sunoco Inc. and Southern Union, is broadlyneutral to positive for ETP's credit risk profile. The transaction will causeETP's EBITDA base to grow materially to about $4 billion, with its overallcash flow diversity notably improving. The transactions do, however, furtherentrench ETP's aggressive growth strategy and that of the ETE family ofcompanies as a whole. The Sunoco acquisition will extend ETP's scale andenhance its competitive position across the natural gas, oil, and natural gasliquids value chain, with the addition of Southern Union bringing additionaldiversity and scale to ETP. We expect ETP's credit measures to slightlyimprove, with debt to EBITDA at about 4x to 4.5x in 2013, which we deem asappropriate for the rating. However, we expect it to be elevated in 2012 atabout 4.75x, with debt to EBITDA 5.1x for the trailing-12-months ended June30, 2012 (in July 2012 ETP issued $670 million of equity which could improvethis ratio by about 0.35x if proceeds are fully used to repay debt).
ETP's greater size and cash flow diversity makes it more resilient tocommodity price risk or pressure from any one of its business lines. ETP'sability to maintain debt leverage at projected levels, however, depends onindustry conditions and management's ability to integrate the assets andrealize synergies. Sustained weakness in the intrastate transportationbusiness and natural gas prices, as well as any pressure on the processingassets from commodity prices, may also affect financial performance. In ourbase-case forecast scenario, we assume ETP's distribution rate is held flat(but its incentive distribution rights
distributions to ETE increasegiven their equity issuances), unhedged natural gas and NGL prices are assumedat our commodity price decks, ETP's intrastate transportation volumes remaindown even though we expect GDP to grow by about 2% in 2012, and solid naturalgas liquids (NGL) transportation and production growth occur due mainly to newassets. We expect distribution coverage to be weak at just under 1x in 2012.
ETE will maintain its general partnership role over the entire ETE family ofcompanies so we expect it to ultimately control all of its subsidiaries. Welink the ratings on ETE and ETP (and thus Southern Union and SXL) becauseseveral members of the management teams and boards of directors overlap andETE can significantly influence the business activities and financialpolicies. Although ETE's debt leverage measures will improve slightly, it willnow receive cash flows produced by SUG via subordinated distributions asopposed to it being a direct subsidiary. As such, we changed our recoveryrating on ETE's senior secured notes to '4' from a '3', which indicates ourexpectation of average (30% to 50%) recovery if a payment default occurs,though we still rate ETE's senior secured notes in line with the 'BB'corporate credit rating. At the ETE level, we expect debt to EBITDA (definedas distributions from its subsidiaries less general and administrativeexpenses) to be about 3.5x with consolidated debt to EBITDA of about 5.25x in2013.
Our corporate credit rating on SXL is in line with that of ETP, reflecting thesignificant amount of control ETP's management will exert over SXL, given itsrole as general partner. Our senior unsecured rating on Sunoco is in line withthat of ETP because ETP is now a co-obligor of Sunoco's debt obligations. Wealso align our rating on Southern Union with our rating on ETP because it iscontrolled by ETP via its ownership by ETP HoldCo.
We view liquidity as "adequate" at ETP, inclusive of the ETP HoldCo level, proforma for the Sunoco and SUG transactions. We also view liquidity at ETE,Sunoco, and SUG as "adequate". For the upcoming 12 months, we expect ETP'sliquidity sources to slightly exceed uses by about 1.4x. Cash sources consistof projected funds from operations (FFO) of at least $3 billion andavailability of about $3.5 billion on ETP, Sunoco, and SUG's revolving creditfacilities. ETP's unrestricted cash as of June 30, 2012, was about $187million. We expect cash uses for ETP, Sunoco, and SUG to include maintenanceand long-lead time projects of at least $2 billion (though total spending maybe notably higher related to discretionary projects), roughly $1.6 billion ofunitholder distributions, and $600 million of debt maturities. We expect allcompanies to remain in compliance with the financial covenants on theirrevolving credit facilities. For ETP, its financial covenant on its revolvingcredit facility requires debt to EBITDA below 5x; ETP's actual figure wasabout 4.39x as of June 30, 2012.
ETP's liquidity and cash generation are adequate to fund its operations andmaintenance capital spending requirements, and to meet its debt service anddistributions. However, ETP must preserve its access to the debt and equitymarkets to raise funds necessary for growth-oriented capital spending andacquisitions and to maintain its ratings. If EBITDA were to come underpressure, we would expect ETP to curtail its growth-oriented capital spendingor use external financing to meet any shortfall, assuming it does not reducedistributions.
ETE's stand-alone liquidity is adequate, in our assessment. For the next 12months, we expect liquidity sources to exceed uses by about 1.2x. Cash sourcesconsist of projected distributions from its subsidiaries of around $1.2billion less interest expense of about $200 million. Revolving credit facilityavailability was $190 million as of June 30, 2012. We expect ETE to distributeessentially all of its cash flow to unitholders every quarter. We would expectcash sources relative to uses to remain positive under most scenarios,although it would quickly erode if ETP were to reduce or halt itsdistributions for any reason. In this event, ETE's liquidity could evaporatequickly, as it maintains only a $200 million revolving credit facility andfaces annual interest payments of roughly $200 million, including preferredcoupons.
Energy Transfer PartnersThe stable outlook on ETP reflects our expectation that its debt to EBITDAwill be sustained at about 4.5x. We also expect the partnership to manage andfinance its capital spending program while keeping an adequate liquidityposition. We could lower the rating if it appears that ETP will sustain itsdebt to EBITDA ratio at or above 4.75x. We do not currently contemplate ahigher rating unless the partnership sustains an improvement in creditmeasures. Specifically, ETP would need to maintain debt to EBITDA below 4x to4.25x for a sustained period to warrant an upgrade.
Energy Transfer EquityThe stable rating outlook on ETE reflects our expectation for continuedstability in the distribution payments it receives from its ownershipinterests in ETP, SUG, and RGP. We expect ETE to deleverage its balance sheet,with stand-alone and consolidated debt to EBITDA of about 3.5x and 5.25x,respectively, in 2013. We could lower the ratings on ETE if it sustains itsstand-alone or consolidated debt to EBITDA ratios above 4x and 6x,respectively, or if it pursues large acquisitions that do not improve itsbusiness risk or consolidated cash flow profile. A downgrade of ETP would notnecessarily lead to a lower rating on ETE unless we believe there is a greaterrisk that distributions to ETE will decrease. We are not contemplating higherratings on ETE, absent a materially more conservative financial policy.
Southern Union Co.Our stable rating outlook on Southern Union reflects our outlook on EnergyTransfer Partners. We expect Southern Union will continue to reduce financialleverage, maintain adequate liquidity, and execute its organic growthstrategy, principally related to its gathering and processing businesssegment. At this time, we consider an upgrade unlikely because of SouthernUnion's ownership by an entity controlled by ETP. Our ratings on ETP and ETEcould influence our ratings on Southern Union because these entities willultimately control Southern Union and have significant influence over itsfinancial policies. A downgrade of ETP would likely result in a lower ratingon Southern Union.
Sunoco Logistics PartnersOur stable rating outlook on Sunoco Logistics Partners reflects our outlook onEnergy Transfer Partners. We expect Sunoco Logistics will continue toaggressively build out its organic growth projects, principally related to itscrude oil pipeline business segment. At this time, we consider an upgradeunlikely because of Sunoco Logistics' ownership by ETP. Our ratings on ETP andETE could influence our ratings on Sunoco Logistics because they willultimately control Sunoco Logistics and have significant influence over itsfinancial policies. A downgrade of ETP would likely result in a lower ratingon Sunoco Logistics.
Related Criteria And Research
-- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; OilPrice Assumptions Are Unchanged, July 24, 2012
-- Standard & Poor's Revises Its Natural Gas Liquids Price AssumptionsFor 2012, 2013, And 2014, June 11, 2012
-- Key Credit Factors: Criteria For Rating The Global Midstream EnergyIndustry, April 18, 2012
Ratings ListRatings Affirmed
Energy Transfer Partners L.P.
Corporate Credit Rating BBB-/Stable/--Senior Unsecured BBB-
Energy Transfer Equity L.P.
Corporate Credit Rating BB/Stable/--Southern Union Co.Corporate Credit Rating BBB-/Stable/--Senior Unsecured BBB-Junior Subordinated BB
Panhandle Eastern Pipe Line Co LP
Corporate Credit Rating BBB-/Stable/--Senior Unsecured BBB-
Rating Affirmed And Recovery Rating Changed
Energy Transfer Equity L.P.
Senior Secured BB BBRecovery Rating 4 3
Ratings Removed From CreditWatch And Lowered
To FromSunoco Logistics Partners L.P.Sunoco Logistics Partners Operations L.P.Corporate Credit Rating BBB-/Stable/-- BBB/Watch Neg/--Senior Unsecured BBB- BBB/Watch Neg
Ratings Affirmed, Removed From CreditWatch, And Withdrawn
To FromSunoco Inc.Corporate Credit Rating BB+/Stable/-- BB+/Watch NegCorporate Credit Rating NR BB+/Stable/--Recovery Rating NR 4Ratings RaisedSunoco Inc.Senior Unsecured BBB- BB+/Watch Neg
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)