NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Energy Transfer Equity, L.P. (ETE) at 'BB-'. In addition Fitch has affirmed ratings for ETE's secured debt at 'BB'. ETE has a Stable Rating Outlook.
A complete list of ETE ratings follows at the end of this release. Approximately $3.8 billion of debt is affected by today's rating action.
Merger Transaction Completed: On Oct. 5, 2012, ETE affiliate Energy Transfer Partners, L.P. (ETP; Fitch IDR of 'BBB-', Negative Outlook) completed a merger with Sunoco, Inc. (SUN). Contemporaneously with the closing of the merger, SUN contributed to ETP $2 billion in cash and equity interests of Sunoco Partners LLC, which currently holds the 2% general partner (GP) interest, incentive distribution rights, and 32.4% limited partner (LP) interest in Sunoco Logistics Partners, L.P. (SXL; IDR 'BBB', Stable Outlook) in exchange for 90,706,000 newly issued Class F units of ETP. In addition, immediately following the merger, ETE contributed its interest in Southern Union Company (SUG; IDR 'BBB-', Stable Outlook) 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 SUN to ETP HoldCo and retained a 40% equity interest in ETP HoldCo.
In addition to its 40% equity interest in ETP HoldCo, ETE owns ETP's GP interest and 52.5 million ETP LP units, and the GP interest in Regency Energy Partners LP (RGP; IDR 'BB', Stable Outlook) and 26.3 million RGP LP units.
Rating Rationale: Fitch believes the merger transaction and resulting HoldCo structure provides significant direct benefits to ETP. ETE primarily stands to gain through its ownership interests in ETP and from the amount and quality of partner distributions it receives from ETP. ETP and ETP HoldCo are expected to provide approximately 95% of ETE's 2013 cash flow. The new holding company simplifies ETP's organizational structure and diversifies and increases the scale of its operations. It has provided an efficient way to drop down SUG assets under ETP control, minimizing transactional risk and external financing. Furthermore, ETP HoldCo will generate tax benefits and contribute to improving adjusted leverage metrics at ETP, which Fitch anticipates will decline to the 4.0x to 4.25x range in 2013 from 4.8x today.
Fitch expects ETE's credit profile to remain consistent with its current rating over the near term. For 2013 Fitch projects ETE's standalone adjusted debt to EBITDA, which measures ETE parent company debt against the distributions it receives from ETP, RGP, and ETP HoldCo less expenses, to range between 3.5x and 3.75x. On a fully consolidated basis, 2013 debt to EBITDA is expected to approximate 5.25x. However, ETE's leverage ratios are expected to improve in future periods through increasing affiliate distributions and potentially from the use of proceeds from the sale of assets to retire debt. It is expected that SUG's utility operations will be sold in 2013 with proceeds to be used to reduce debt at SUG and ETE.
The 2012 acquisitions of SUN and SUG not only increased and diversified ETE's consolidated operations, they resulted in a higher percentage of contractually supported fee-based margins. The SUN acquisition added crude oil, refined products, and retail operations. SUG provided stable interstate pipelines and midstream services. Also, in January 2012 ETP sold its propane operations which reduced its and ETE's sensitivity to weather and commodity prices.
Liquidity is Adequate: ETE has access to a $200 million secured revolving credit facility that matures in June 2015. At June 30, 2012, $10 million was outstanding under the revolver. ETE has minimal working capital needs. The revolver has a maximum leverage test of 5.5x, a minimum fixed-charge coverage test of 1.5x, and a minimum value to loan test of 2.0x. At June 30, 2012, ETE met its financial covenants.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--A lessening of consolidated business risk as ETE affiliates acquire and expand pipeline and fixed-fee midstream businesses;
--Positive rating actions at ETP and RGP:
--A material improvement in ETE credit metrics with sustained leverage below 3.0x as affiliate cash distributions increase.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Higher leverage at ETE's operating affiliates to support organic growth and acquisitions;
--Weakening operating performance resulting in negative rating actions at ETP and RGP;
--Standalone ETE debt to EBITDA above 5.0x.
The following ratings have been affirmed by Fitch with a Stable Outlook:
Energy Transfer Equity, L.P.
--Secured senior notes 'BB';
--Secured revolving credit facility;
--Secured term loan.
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;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities' June 10, 2012;
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' May 1, 2012;
--'Master Limited Partnerships 101' Nov. 1, 2011;
--'Natural Gas Pipelines: Hot Topics' Oct. 13, 2011.
Applicable Criteria and Related Research:
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk
Master Limited Partnerships 101
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012 (Second-Quarter Review)
Corporate Rating Methodology
Ralph Pellecchia, +1 212-908-0586
One State Street Plaza, New York, NY 10004
Peter Molica, +1 212-908-0288
Sean Sexton, CFA, +1 312-368-3130
Brian Bertsch, +1 212-908-0549
Source: Fitch Ratings