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Fitch Affirms Ratings on Energy Transfer Partners (ETP); Outlook Remains Stable

April 29, 2016 2:11 PM EDT

Fitch Ratings has affirmed its Long-Term Issuer Default Rating (IDR) and senior unsecured ratings on Energy Transfer Partners, LP (NYSE: ETP) at 'BBB-' and its junior subordinated debt rating at 'BB'. Fitch has also affirmed Panhandle Eastern Pipe Line Company's (Panhandle) Long-Term IDR and senior unsecured ratings at 'BBB-' and its junior subordinated debt rating at 'BB.' Additionally, Fitch has affirmed the senior unsecured ratings on the legacy debt of Regency Energy Partners, LP (RGP) and Sunoco, Inc. at 'BBB-.' The Long-Term IDR of RGP was affirmed at 'BBB-' and withdrawn as ETP has assumed the legacy outstanding RGP notes. RGP's Series A Preferred Stock rating was affirmed at 'BB' and withdrawn. A full list of ratings actions follows at the end of this release. The Rating Outlook for all entities is Stable.

The affirmation of ETP's rating and Stable Outlook reflects the size and scale of ETP's operations which offer both business line diversity and geographic diversity, with operations spanning most major domestic production basins. The affirmation recognizes that ETP's earnings and cash flow should be relatively stable near term even with continued price weakness, driven by an expected 90% of 2016 gross margin derived from fixed fee contracts. Counterparty exposure remains a concern with continued bankruptcies within the upstream space expected near term but Fitch expects ETP's counterparty portfolio to remain heavily weighted towards investment grade counterparties.

ETP's adjusted leverage is currently high, ending 2015 at roughly 5.3x based on Fitch's calculations. Fitch calculates ETP's adjusted debt/EBTIDA on a consolidated basis inclusive of Sunoco Logistics Partners, LP (SXL; 'BBB'/Stable Outlook) and cash distributions from unconsolidated affiliates. Fitch expects consolidated adjusted leverage in 2016 to improve slightly but remain high at roughly 5.0x to 5.2x at year-end 2016 improving to below 5.0x in 2017 and beyond. ETP's capital spending budget for 2016 remains relatively robust, but the partnership has taken steps to raise needed funding through alternative means, including the $2.2 billion retail marketing sale to Sunoco, LP (SUN; 'BB'/Stable Outlook). Fitch expects ETP to focus on balanced funding of capital needs to manage leverage metrics towards its stated target of 4.5x debt/EBITDA based on their revolver covenant calculations.

The affirmation considers the increased uncertainty around the merger between ETP's parent and sponsor Energy Transfer Equity, LP (ETE; 'BB'/Stable Outlook) and Williams Companies, Inc. (WMB; 'BB+'/Rating Watch Negative). Fitch assumes that the merger does move forward as currently contemplated and that ETE remains committed to an investment grade profile at ETP. Other considerations include ETP's structural subordination to subsidiary debt and uncertainties resulting from potential future structural changes are also considered. The potential effect on pipeline system utilization and related re-contracting risk resulting from changing natural gas supply demand dynamics are longer-term concerns.

Panhandle's rating affirmation reflects its affiliation with ETP and expectations that ETP will continue to manage Panhandle's credit metrics and liquidity needs at levels appropriate to support its 'BBB-' rating. Panhandle is a wholly-owned subsidiary of ETP. Fitch does not expect any additional material transactions or growth initiatives at Panhandle and expects that future debt maturities will be financed through issuance at the ETP level. ETP is expected to provide any liquidity needs to Panhandle and refinance any Panhandle maturities at the ETP level and take any excess cash flow to use at ETP. Panhandle's standalone credit profile is consistent with a 'BBB-' or better IDR; however, given their strategic, operational and legal ties, Fitch believes it appropriate to link Panhandle's ratings with those of its parent, ETP.

KEY RATING DRIVERS

Large Diversified Asset Base: ETP's geographic and business line diversity provide a solid operating asset base and what has been a decent platform for growth within most of the major U.S. production regions. Currently, the partnership and its subsidiaries (including SXL) own and operate roughly 62,500 miles of natural gas, crude and natural gas liquids (NGL) pipelines, 65 processing plains, treating plants and fractionators, significant compression, and large scale, underground liquid and natural gas storage. While commodity price exposure and counterparty risks are relatively limited, some of ETP's businesses are subject to both counterparty and volumetric risks. With low commodity prices, production within ETP's areas of operations could be challenged, but ETP's broad geographic diversity should help. The potential effect on pipeline system utilization and related re-contracting risk resulting from changing natural gas supply/demand dynamics is a longer term concern.

Relatively Stable, Consistent Cash Flows: As ETP has grown its large asset base, the percentage of gross margin supported by fee-based contracts has gradually increased, with the partnership moving from roughly 76% either fee based or hedged for 2015 (71% fee/5% hedged) up to 90% expected in 2016, due in part to new projects coming online with heavy fee-based components. Counterparty exposure is significantly weighted toward investment grade names, with roughly 88% of ETP's counterparties rated investment grade. No one customer accounts for more than 10% of revenue and its top 20 customers which account for approximately 46% of a total $1.4 billion in unsecured exposure is BBB or better with only $28 million in exposure 'BB+' or worse.

Moderate Financial Flexibility: ETP has largely met all of its capital needs for 2016 for all of its expected capital spending. The sale of all of the remaining retail marketing assets ETP owned to affiliate Sunoco LP for $2.2 billion was a large contributor of this capital. The dropdown transaction is a good example of the flexibility that ETP's relationship with the rest of the ETE family provides. It is also one of the several levers ETP has to pull in order to access capital without having to lever up its balance sheet in the current challenged capital markets including further capital spending cuts, potential parental support in the form of additional incentive distribution waivers, non-core asset sales, and or potential non-recourse project financing on select projects.

High Leverage; Adequate Distribution Coverage: ETP's adjusted leverage is currently high, with 2015 YE leverage on a consolidated basis of roughly 5.3x (inclusive of distributions from non-consolidated joint ventures). Fitch expects 2016 leverage on a consolidated basis of roughly 5.0x improving modestly to between 4.75x and 4.9x/annually through 2019. Distribution coverage is expected to be roughly 1.0x for 2016 improving to above 1.0x assuming flat distributions for 2016 and 2017.

KEY ASSUMPTIONS

--Base case commodity prices are consistent with Fitch's price deck. Fitch's price deck assumes modestly rising commodity prices, with WTI pf $35/bbl for 2016, $45/bbl for 2017 and $55/bbl for 2018 and a long-term price of $65/bbl. Henry Hub natural gas of $2.25/mcf for 2016, $2.50/mcf for 2017, $2.75/mcf for 2018, and $3.25/mcf long term.
--2016 growth spending consistent with current management guidance (roughly $4.2 billion). Growth projects completed on time at an average 8.0x EBITDA multiple. Growth spending declining in 2017-2019.
--Flat distribution in 2016 with slight to moderate distribution growth in outer years.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A material improvement in credit metrics with ETP adjusted leverage sustained at below and 4.0x on a consolidated basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Weakening credit metrics with adjusted leverage above 5.0x on a sustained basis would likely lead to a downgrade to BB+; Fitch expects adjusted leverage for 2016 to be at or slightly above 5.0x, but improve to below 5.0x in 2017 and beyond.
--Continued distribution coverage below 1.0x. Fitch expects 2016 distribution coverage to be at or slightly below 1.0x improving to above 1.0x in 2017 and beyond.
--Increasing commodity exposure above 30% could lead to a negative ratings action if leverage were not appropriately decreased to account for increased earnings and cash flow volatility.

LIQUIDITY

Liquidity Adequate: ETP has access to a $3.75 billion secured five-year revolving credit facility that matures in November 2019. Following the $2.2 billion Sunoco LP transaction which closed in March 2016, ETP had roughly full availability under its revolver. The credit facility contains a financial covenant that provides that on each date ETP makes a distribution, the leverage ratio, as defined in the credit agreement, shall not exceed 5.0x, with a permitted increase to 5.5x during a specified acquisition period, as defined in the credit agreement. ETP is currently in compliance with this covenant. As per the covenant EBITDA definition ETP is permitted a material project adjustment which adds back incremental EBITDA for projects currently under construction. This gives ETP a fair amount of headroom with regard to its leverage covenant. ETP was well within covenant compliance for 2015 and Fitch expects covenant compliance for the balance of 2016. Distribution coverage is expected to be at or slightly below 1.0x for 2016, but improve to above 1.0x thereafter. An expected persistent shortfall in distribution coverage below 1.0x could lead to a negative ratings action.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Energy Transfer Partners, LP
--Long-Term IDR at 'BBB-';
--Senior unsecured rating at 'BBB-';
--Junior subordinated notes at 'BB'.

Regency Energy Partners, LP (ETP has assumed the Regency debt)
--Long-term IDR at 'BBB-' and withdrawn;
--Senior unsecured rating at 'BBB-';
--Series A Preferred Units at 'BB' and withdrawn.

Sunoco, Inc. (ETP is co-obligor on Sunoco, Inc. debt, which is listed under Energy Transfer Partners, L.P. on the Fitch web site).
--Sr. Unsecured Rating: 'BBB-'.

Panhandle Eastern Pipe Line Co. (Panhandle)
--Long-Term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Junior subordinated notes at 'BB'.

The Rating Outlook for all entities is Stable.



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