S&P Removes Energy Transfer Equity (ETE) Ratings from CreditWatch Negative

S&P Global Ratings affirmed its 'BB' corporate credit rating and other ratings on U.S. midstream energy master limited partnership (MLP) Energy Transfer Equity L.P. (NYSE: ETE) and removed them from CreditWatch with negative implications. The outlook is stable. The '4' recovery rating on the senior secured debt is unchanged and indicates expectation for average recovery (30%-50%; upper end of the range) if a default occurs.

The rating action reflects our expectation that ETE's stand-alone financial leverage will be in line with our pre-merger estimates. We believe ETE's stand-alone debt to EBITDA (defined as distributions from its subsidiaries minus general and administrative expenses) to be in the 3.5x to 3.75x range for 2016 and EBITDA interest coverage to be about 5.5x. Our projections assume that distributions to ETE are somewhat lower than our previous forecast, mainly due to incentive distribution right (IDR) subsidies for ETP that benefit the partnership's distribution coverage ratio and will support the credit profile. We also expect ETE to maintain more robust distribution coverage ratios in the 1.3x to 1.4x area through 2018.

Our assessment of ETE's cash flow diversity is positive, because in our view, we do not consider the default characteristics of the underlying MLPs and the Lake Charles LNG regasification facility in Louisiana to be highly correlated. ETE's assets solely consist of its general partner and limited partner interests in ETP, Sunoco Logistics, Sunoco, and Lake Charles.

Our assessment of cash flow interruption risk as neutral reflects the relative stability of the underlying cash flows at ETP, Sunoco Logistics, Sunoco L.P., and Lake Charles, as well as our expectation that ETE will maintain ample distribution coverage through 2018. We expect about 80% of consolidated cash flows to come from fee-based operations, which will continue to provide some predictability of upstream distributions to ETE. Somewhat countering this, a significant portion of ETE's cash flows relate to incentive distribution rights, which would fall at a disproportionate rate if the underlying MLPs were to cut their distribution rates.

"The stable rating outlook on ETE reflects our expectation for relative stability in the distribution payments it receives from its ownership interests in its operating subsidiaries such that stand alone debt to EBITDA will remain below 4x," said S&P Global Ratings credit analyst Michael Grande.

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