NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the senior unsecured ratings of Sunoco, Inc. to 'BBB-' from 'BB+' following the close of the acquisition of Sunoco, Inc. (SUN) by Energy Transfer Partners, L.P.(ETP; 'BBB-', Negative Outlook), as well as ETP's announcement that it would become a co-obligor on Sunoco, Inc.'s existing senior unsecured notes in order to satisfy the consolidation, merger and sale covenant associated with the notes' indenture. Fitch has also upgraded to 'BBB-' from 'BB+' and withdrawn ratings on Sunoco's long-term Issuer Default Rating (IDR) and upgraded to 'BBB' from 'BBB-' and withdrawn the secured rating on Sunoco's 364-day credit facility. No rating actions were taken on Sunoco Logistics (SXL; 'BBB', Stable Outlook).
Approximately $965 million of outstanding Sunoco, Inc. unsecured debt is affected by today's action. A full list of rating actions follows at the end of this release.
Sunoco's standalone performance prior to the merger was strong. For the latest 12 months (LTM) period ending June 30, 2012, the company generated EBITDA of $1.56 billion, up sharply from the $724 million seen at year-end (YE) 2011. Key drivers for improved performance included improved performance in refining and one-time LIFO inventory gains, strong contributions from logistics, and reduced corporate expenses. Given Sunoco's debt balances of $2.55 billion, SUN's LTM debt/EBITDA at June 30, 2012 was just 1.64x; however, this figure includes consolidated debt from Sunoco Logistics (SXL). Excluding these sources of debt, and netting out EBITDA contributions from SXL, SUN's adjusted debt/EBITDA as calculated by Fitch was just 0.7x.
Sunoco's liquidity prior to the merger at June 30, 2012 was robust and included $655 million in availability on its existing 364 day secured revolver, $165 million of availability on its accounts receivable securitization facility as well as cash of $1.88 billion, resulting in total liquidity of $2.7 billion. That facility was terminated at the close of the ETP-SUN transaction, and immediately following the deal, any liquidity needs that arise at the Sunoco level are expected to be met by liquidity from parent ETP.
At the closing of the merger, Sunoco contributed to ETP $2 billion in cash and the equity interests of Sunoco Partners LLC (which currently holds the 2% general partner interest, incentive distribution rights, and a 32.4% limited partner interest in Sunoco Logistics Partners, L.P. (SXL), in exchange for 90,706,000 newly issued Class F units of ETP. Additionally, immediately following the closing of the merger, Energy Transfer Equity, L.P. (ETE) contributed its interest in Southern Union Company (Southern Union) to ETP Holdco Corporation (ETP Holdco), in exchange for a 60% equity interest in ETP Holdco. In conjunction with ETE's contribution, ETP contributed its interest in Sunoco (exclusive of its interest in SXL) to ETP Holdco and retained a 40% equity interest in ETP Holdco.
As a result of the merger and the above transactions, ETP and ETE own an indirect 40% and 60% equity interest, respectively, in both Sunoco and Southern Union, while ETP owns the general partner interests, incentive distribution rights and a 32.4% limited partner interest in SXL. The new structure simplifies ETP's organizational structure and diversifies and increases the scale of its operations. Fitch believes it will provide an efficient way to drop down assets to ETP, resolving uncertainties about future dropdowns and eliminating transactional and capital market risks.
In addition to any operational benefits, it is Fitch's expectation that ETP HoldCo will generate tax benefits and contribute to improving leverage metrics at ETP. Given the limited amount of ETP debt needed to complete the SUN merger and the expected cash flows to be generated by SXL and ETP HoldCo, ETP's consolidated company and stand-alone debt to EBITDA should approach 4.0 times (x) in 2013, down from approximately 4.8x at June 30, 2012.
Rating Rationale For ETP: ETP's ratings and outlook consider the benefits of scale and diversity provided by the SUN acquisition. It also recognizes the limited amount of new debt required to complete the transaction and modestly favorable impact on its leverage metrics. The SUN acquisition will change ETP's future cash flow mix by adding crude oil, refined products and retail operations. It will expand and enhance the services it can provide to customers. Approximately 29% of estimated 2012 pro forma consolidated cash flow will now come from NGLs, crude oil, and refined products. An additional 10% will come from retail marketing.
ETP's Outlook remains Negative, which reflects its aggressive acquisition and organic growth activities, the associated transactional risk, and the impact these activities have on credit metrics. ETP will continue to have significant future financing obligations beyond the SUN purchase including capital contributions to joint ventures. As a result Fitch expects that ETP's debt to EBITDA to remain over 4.0x through 2013.
WHAT COULD TRIGGER A RATING ACTION
Following the transaction, catalysts for future rating actions for Sunoco's unsecured debt center on changes in credit quality at parent ETP. Possible catalysts for negative rating actions include higher than anticipated leverage or weakened liquidity at the parent. Possible catalysts for a positive rating action include a long-term improvement in debt to EBITDA leverage to approximately 4.0x on a sustained basis or further lessening of business risk at the parent.
Sunoco's ratings following today's rating action are as follows:
--Long-term IDR to 'BBB-' from 'BB+' and withdrawn;
--Senior secured revolver to 'BBB' from 'BBB-' and withdrawn;
--Senior unsecured notes to 'BBB-' from 'BB+'.
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);
--'Pipelines, Midstream, and MLP Stats Quarterly - Second-Quarter 2012', (Sept. 27, 2012);
--'Impact of Lower NGL Prices on Midstream Processors' (Aug. 27, 2012);
--'Updating Fitch's Oil & Gas Price Deck', (Aug 15, 2012);
--'Marcellus Shale Report: Midstream and Pipeline Sector - Challenges/Opportunities', (July 10, 2012);
--'North American Refining Update' (June 4, 2012);
--'Fitch Affirms Energy Transfer Partners, Sunoco Logistics, & Sunoco Inc on Acquisition Announcement' (April 30, 2012);
--'Downstream M&A: Low Multiples Limit Credit Risk for Buyers' (May 26, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012 (Second-Quarter Review)
Impact of Lower NGL Prices on Midstream Processors
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
North American Refining Update
Downstream M&A: Low Multiples Limit Credit Risk for Buyers
Mark C. Sadeghian, CFA, +1-312-368-2090
70 W. Madison Street
Chicago, IL 60602
Daniel Harris, +1-312-368-3217
Dave Peterson, +1-312-368-3177
Brian Bertsch, New York, +1-212-908-0549
Source: Fitch Ratings