Fitch Affirms Regency Energy Partners, LP's IDR at 'BB'; Outlook Stable
Fitch Ratings has affirmed Regency Energy Partners, LP's (RGP) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BB' following RGP's announced acquisition of Southern Union Gathering Company, LLC (SUGS). The Rating Outlook is Stable. A full list of ratings is at the end of this release.
RGP announced this morning that it will be acquiring SUGS from Southern Union Company, a jointly owned affiliate of Energy Transfer Equity, L.P. (ETE; IDR 'BB-') and Energy Transfer Partners, L.P. (ETP; IDR 'BBB-') for $1.5 billion. The transaction will be financed with $900 million in new Regency units issued to Southern Union Company comprised of $750 million of new common units and $150 million of new class F common units. The class F common units will be equivalent to common units except will not receive distributions for the equivalent of eight consecutive quarters post-closing. The remaining $600 million will be paid in cash funded from long-term borrowings.
KEY RATINGS DRIVERS
Increased Size/Scale: The acquisition of the SUGS assets helps RGP to increase the size and scale of its gathering and processing operations, with a beneficial focus on the Permian basin. SUGS's operations are generally moderate risk and will increase RGP's presence in the Permian basin where production and the need for gathering and processing services is expected grow. Additionally, SUGS provides decent organic growth opportunities for RGP with two large scale projects currently under construction.
Balanced Funding/Owner Support: The balanced financing of the acquisition (60% equity/40% debt) and the support that ETE is providing by forgoing some of their incentive distribution rights (IDRs) and their $10 million management fee for two years, helps the deal be accretive to earnings.
Increased Commodity Price Exposure: The affirmation considers that RGP will be increasing its commodity price exposure as a result of the transaction. With SUGS, RGP will be increasing both the size of its gathering and processing operations and its contribution to EBITDA, which should raise its sensitivity to changes in commodity prices. However, Fitch expects RGP will hedge its open commodity exposure, consistent with current practices.
Increased Initial Leverage: At deal close, Fitch expects RGP's leverage to move higher relative to Fitch's prior expectations but remain within expectations for the ratings category and comparable to similarly rated peers. Fitch expects RGP's debt-to-adjusted EBITDA to be roughly 5.9x for 2013 (assuming a second quarter close and a 50% equity credit for RGP's preferreds) pro forma for the transaction, and 4.0x-4.5x for 2014. This is compared to Fitch's prior expectations of between 4.0x-4.25x and below 4.0x for 2013 and 2014 respectively. Should leverage remain elevated above 4.5x for a sustained time period Fitch would consider a negative ratings action. Fitch typically adjusts EBITDA to exclude nonrecurring extraordinary items, and noncash mark-to-market earnings. Adjusted EBITDA excludes equity in earnings and includes dividends from unconsolidated affiliates.
JV/Structural Subordination: RGP is the owner of several joint venture (JV) interests some of which have external debt. RGP is structurally subordinate to the cash operating and debt service needs of these JVs and reliant on JV distributions to fund its capital spending and its own distributions. This transaction should help to reduce the percentage of cash flow RGP receives from non-consolidated JVs on an overall basis.
General Partner Relationship: While Fitch's ratings are largely reflective of RGP's credit profile on a stand-alone basis, they also consider the company's relationship with ETE, the owner of its general partner interest. ETE's general partner interest gives it significant control over the MLP's operations, including most major strategic decisions such as investment plans, and management of daily operations. The relationship has also provided investment opportunities that might otherwise be unavailable to RGP, such as this current transaction.
Adequate Liquidity: RGP's liquidity is adequate with roughly $1 billion in availability under its $1.15 billion revolving credit facility at Dec. 31, 2012. The revolving credit facility contains financial covenants requiring RGP and its subsidiaries to maintain a debt to consolidated EBITDA ratio (as defined in the credit agreement - includes JV and material projects pro forma EBITDA)of less than 5.25x, consolidated EBITDA to consolidated interest expense ratio greater than 2.75x and a secured debt to consolidated EBITDA ratio of less than 3.0x.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Continued large-scale capital expenditures funded by higher than
expected debt borrowings;
--A failure to hedge open commodity price exposure.
--Significant and prolonged decline in prices for NGLs, crude and natural gas;
--Aggressive growth of distributions at RGP.
--Debt/Adj. EBITDA above the 4.5x to 5.0x range and distribution coverage below 1.0x on a sustained basis.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A material improvement in credit metrics with sustained leverage at 4.0x or below.
Fitch has affirmed the following ratings:
--Long-term IDR 'BB';
--Senior secured revolver 'BB+';
--Senior unsecured notes 'BB';
--Series A preferred units 'B+'.
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;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 13, 2012;
--'The Top Ten Differences Between MLP and Corporate Issuers' Feb. 19, 2013;
--'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012;
--'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012;
--'2013 Outlook: Crude Oil and Refined Products Pipelines' Nov. 29, 2012;
--Eagle Ford Shale Report - Economics Driving Growth' Oct. 15, 2012;
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities' June 10, 2012.
Applicable Criteria and Related Research
The Top Ten Differences Between MLP and Corporate Issuers
2013 Outlook: Natural Gas Pipelines & MLPs
2013 Outlook: Midstream Services and MLPs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
2013 Outlook: Crude Oil and Refined Products Pipelines
Eagle Ford Shale Report (Midstream and Pipeline Sector -- Economics Driving Growth)
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Peter Molica, +1-212-908-0288
Fitch Ratings, Inc.
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Ralph Pellecchia, +1-212-908-0586
Mark C. Sadeghian, CFA, +1-312-368-2090
Brian Bertsch, +1-212-908-0549