Fitch Places Energy Transfer Equity, LP on Rating Watch Positive
Fitch believes the merger of WMB is positive for ETE. It should benefit from the acquisition of WMB and its controlling ownership interest in Williams Partners, LP (WPZ; 'BBB', /Rating Watch Negative) and WPZ's operating pipelines. The combined ETE/WMB group of companies will become the largest energy infrastructure group in the U.S. It will have a significant amount of geographic diversity, as well as, an advantageous focus on the Northeastern U.S. where there is significant demand for midstream service solutions. The combined family should create greater scale and cash flow diversity including increased cash flows from higher rated subsidiaries up to ETE.
From an operational standpoint, Fitch believes WMB's and WPZ's addition to the ETE family of partnerships will have many strategic positives. Generally, bigger is better in the master limited space (MLP) space and the size, scale, and geographic and business line diversity that a combination of WMB with the ETE family would create could provide a significant opportunity for benefits on projects and existing assets from all the affiliated entities, as well as operational and financial synergies.
From a financial perspective, Fitch expects ETE's cash flow to diversify and increase, as WPZ limited partner and general partner incentive distributions will become the largest provider of cash flow to ETE. WPZ is expected to make up roughly 54% of ETE's cash flow in 2015 pro forma for the transaction. Absent the transaction, Energy Transfer Partners, LP (ETP; 'BBB-'/Stable Outlook), a lower-rated entity compared to WPZ, was expected to make up 74% of ETE's cash flows. This shift should provide modest credit uplift to ETE's credit profile provided WPZ continues to be managed to 'BBB' business risk profile and credit metrics. Pro forma for the transaction, management expects 2015 cash distributions from subsidiaries of roughly \\$3.9 billion, which has the potential to grow significantly through 2018 as WMB, ETP, Sunoco Logistics, LP (SXL; 'BBB'/Stable Outlook) and Sunoco, LP (SUN; 'BB'/Stable Outlook) all work through heavy growth-capital spending backlogs. Management also expects to achieve a fair amount of synergies from the transaction.
The resolution of the Rating Watch will be determined at or near merger closing. The expected ratings action will ultimately be determined by the credit profiles of ETE's underlying operating partnerships, capital funding and distribution plans at the partnerships and at ETE, and cash flow expectations at ETE in support of its leverage. Fitch would expect ETE to strive to maintain or improve current ratings profiles at each of its operating subsidiary partnerships and to reduce stand-alone parent company leverage in order to achieve a positive rating action. WMB is expected to become a co-obligor on ETE's notes and ETE is expected to become a co-obligor on WMB's notes at merger close. Fitch would equalize the ratings of WMB and ETE upon merger close.
KEY RATING DRIVERS
Increased Scale and Diversity: Recent mergers and growth projects at and among ETE's subsidiaries have resulted in a larger, more diversified, and generally stronger family of Energy Transfer companies. Pro-forma for the WMB merger the Energy Transfer group is expected to become the largest energy infrastructure company which should offer increased advantages of scale and the potential for a fair amount of synergy savings. Additionally, on a consolidated basis, the percentage of contractually supported fee-based margins has gradually increased and will continue to rise pro-forma for the WMB merger as WPZ's gross margin profile is over 80% fixed fee. ETE should benefit from the slightly improved credit profile of its subsidiaries though it remains structurally subordinate to a significant amount of subsidiary debt. Pro-forma for the merger with WMB, the percentage of cash flows up to ETE from its underlying subsidiaries coming from BBB rated entities is expected to increase, with WPZ (BBB/ RWN) expected to become the largest provider of cash distributions up to the combined ETE/WMB.
Continued Growth at Partnerships: Cash flow up to ETE is expected to grow significantly over the next several years as it partnerships work through large organic capital spending backlogs. Current board approved projects at the ETE family of partnerships and the WMB family is over \\$50 billion. These projects are largely contracted for and should provide solid returns even in the current commodity price environment, which should drive increased distributions up to ETE.
Leverage Metrics Expected to Improve: ETE's adjusted debt-EBITDA, which measures ETE parent company debt against distributions it receives from its affiliates less ETE specific general and administrative expenses, was 4.3x at the end of 2014. Standalone leverage at ETE is expected to be maintained in the 3.0x to 4.0x range pro-forma for the acquisition for 2016, but improve to below 3.0x in 2017. Fitch had previously listed that a material weakening in leverage metrics beyond 4.5x could result in a negative rating action and continues to believe this to be appropriate. However, with the increased percentage of cash flow received by ETE coming from higher rated entities Fitch believes that expectations for sustained leverage on a standalone below 3.0x would be catalyst for a positive rating action provided more than 50% of cash distributions are coming from subsidiaries rated 'BBB' or better. Fitch has typically maintained a 0-to-2 notch difference in IDRs between parent and subsidiaries MLPs in cases where subsidiaries MLPs have had stronger credit profiles than their ultimate parent company.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--WTI oil price that trends up from \\$50/barrel in 2015 to \\$60/barrel in 2016 and a long-term price of \\$75/barrel; and Henry Hub gas that trends up from \\$3/mcf in 2015 to \\$3.25/mcf in 2016 and a long-term price of \\$4.50/mcf consistent with Fitch's published Base Case commodity price deck;
--Moderate revenue growth on existing assets at subsidiaries;
--Distribution growth at subsidiaries based on public guidance;
--Balanced funding of projected growth capital spending at subsidiaries with both debt and equity funding of growth capital spending and acquisitions aimed at maintain leverage and coverage metric profiles consistent with current ratings.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--ETE parent company debt to EBITDA maintained below 3.0x provided the majority of distributions up from subsidiaries are coming from 'BBB' rated subsidiaries;
--Improving credit profiles at underlying partnerships.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Increasing ETE parent company leverage above 4.5x;
--Weakening credit profiles or negative ratings actions at underlying partnerships. Fitch would seek to maintain a one to two notch separation between ETE and the entities providing the majority of the cash needed to support ETE's structurally subordinated debt.
LIQUIDITY
Liquidity is Adequate: ETE has access to a \\$1.5 billion secured revolving credit facility that matures in December 2018. ETE's operating affiliates have significant operating flexibility with adequate liquidity and the ability to fund their planned growth with capital market transactions. Potential uses of the revolver include: funding stock buybacks, future acquisitions, and to initiate organic growth projects not financed at the MLPs. Pro forma for the transaction maturities remain highly manageable with the combined ETE/WMB having no significant debt maturities until 2018. Approximately \\$230 million was drawn under ETE's revolver as of June 30, 2014 leaving \\$1.27 billion in availability. The revolver capacity was increased to \\$1.5 billion (from \\$1.2 billion) in February 2015.
The ETE revolver and term loans have two financial covenants: a maximum leverage ratio of 6.0x to 1.0x; 7.0x to 1.0x during a specified acquisition period and fixed charge coverage ratio of 1.5x to 1.0x. ETE notes, term loan and credit facility are secured by a first priority interest in all tangible and intangible assets of ETE, including its ownership interests in ETP. ETE was in compliance with all of its covenants as of June 30, 2015. Pro-forma for the transaction ETE is expected to be well within compliance of its covenants.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Positive:
Energy Transfer Equity, L.P.
-- Issuer Default Rating (IDR) at 'BB';
--Secured senior notes at BB+';
--Secured term loan at 'BB+';
--Secured revolving credit facility at 'BB+'.
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