Fitch Affs Energy Transfer Partners & Energy Transfer Equity; Outlook Stable
2009-05-08 20:28:05 -
Fitch Ratings affirms the ratings for Energy Transfer Partners, L.P.
(ETP) and Energy Transfer Equity, L.P. (ETE) as listed below. ETE owns approximately 62.5 million ETP limited partner (LP) units and ETP's 2% general partner (GP) interest. Approximately $6.6 billion of outstanding debt securities are affected. The Rating Outlook for both entities is Stable.
Energy Transfer Partners, L.P.
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Energy Transfer Equity, L.P.
--IDR at 'BB-';
--Senior secured term loan at 'BB';
--Senior secured revolving credit facility at 'BB'.
ETP's ratings and Stable Outlook reflect the increasing scale, scope, and diversity of its operations, strong historical quantitative credit measures, a conservative distribution policy, a favorable near-term regional natural gas supply position from expanding Shale developments, and the expected benefits of ongoing contractually supported pipeline expansions. ETP's credit measures are consistent with its peer group of investment-grade master limited partnerships (MLPs). However, a substantial capital spending program directed mostly toward pipeline expansion projects has resulted in debt leverage above historical norms until its new projects generate operating returns.
ETP has been aggressive in maintaining a strong liquidity position throughout its construction build-out. During 2009, ETP has so far issued nearly $580 million of common units and $1 billion of capital market debt, with proceeds used to reduce bank revolver borrowings and for expansion capital spending. The company's debt to EBITDA for the 12 months ended December 2008 was approximately 4.3 times (x), adjusting for joint venture debt that it guarantees. Fitch expects debt leverage to drop to approximately 4x in 2009 as new pipeline projects become operational and cash flows increase. In addition, ETP has maintained one of the most conservative distribution practices among investment-grade MLPs. Fitch estimates that over the next two years ETP could retain over $500 million of distributable cash flow that can be used for growth spending, hence minimizing its external financing.
ETE's ratings and Stable Outlook are primarily dependent on the financial and operating characteristics of ETP, the standalone credit profile of ETE, and the favorable recovery prospects for its senior secured creditors under distressed conditions. Fitch considers fiscal 2008 debt-to-EBITDA of 2.9x as strong for an MLP holding company structure and should not present an inordinate amount of risk for ETE and ETP given the quality of its cash flow stream. Over the long term ETP's upstream cash distributions should increase as several ongoing expansion projects become operational and its distribution coverage is adjusted to reflect lower operating and financial risk. As a result, ETE's cash flow ratio will strengthen. However, Fitch recognizes that ETE's outstanding $1.572 billion of debt is substantial and its ability to refinance the debt in the future could be impaired by constrained capital market conditions.
Fitch also considered recovery prospects for ETE's senior secured lenders in a distressed situation. Based on the value-to-loan ratio definition in ETE's credit agreement, at current market prices creditors would have recovery valuations in excess of 400%. Moreover, under reasonable stress case scenarios Fitch found that above-average recoveries for creditors were likely.
While ETP's track record of acquiring, building, integrating, expanding and financing energy infrastructure assets has been favorable, several challenges remain. Of ongoing concern is the event and integration risk inherent in ETP's active growth strategy. Of particular interest is the industry-wide inflation of pipeline construction costs on major projects and their effect on project economics. Most notably for ETP, estimated costs on Midcontinent Express Pipeline (MEP), a joint venture with KMP, have continued to increase. ETP and KMP each guarantee borrowings under MEP's $1.3 billion fully-drawn bank credit facility, in proportion to their 50% ownership of the project.
In addition, factors also considered by Fitch in ETP's rating analysis include: the structural subordination of the ETP notes to approximately $700 million of combined subsidiary debt at Transwestern Pipeline and Heritage Operating L.P. (Heritage); the financial exposure to changes in commodity prices at its Midstream gas processing operations in southeast Texas; the financial exposure to market manipulation legal proceedings brought by FERC and the structural relationships between affiliated companies, including approximately $1.57 billion of debt at ETE.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com : www.fitchratings.com .
Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New YorkRalph Pellecchia, +1-212-908-0586Joseph
Sorce, +1-312-368-3161 (Chicago)Media Relations:Cindy
Stoller, +1-212-908-0526 cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
