Fitch Ratings has assigned a 'BB' rating to Regency Energy Partners L.P.'s (RGP) proposed $600 million senior notes offering due 2023 (senior notes). Proceeds will be used to help fund RGP's acquisition of Southern Union Gathering Company, LLC (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-').
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, they increase RGP's presence in the Permian basin where production and the need for gathering and processing services is expected to grow. Additionally, SUGS provides decent organic growth opportunities for RGP with two large scale projects currently under construction.
Balanced Funding/Owner Support: The SUGS acquisition is being funded with a combination of this debt offering and $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 balanced financing of the acquisition (60% equity/40% debt) and the support that ETE is providing by forgoing some of its incentive distribution rights and its $10 million management fee for two years, helps the deal be accretive to earnings.
Increased Commodity Price Exposure: The rating 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 exposure consistent with current practices.
Increased Initial Leverage: With the SUGS acquisition, Fitch expects RGP's leverage to move higher relative to Fitch's prior expectations but remain well within expectations for the ratings category for MLPs 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 (2Q) close for the transaction and between 4.0x to 4.5x for 2014. 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 overall percentage of cash flow RGP receives from non-consolidated JVs.
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 the 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 debt to consolidated EBITDA ratio(as defined in the credit agreement - including 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 less than 3.00x.
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 or reluctance to hedge open commodity price exposure.
--Significant and prolonged decline in demand/prices for NGLs, crude and natural gas;
--Aggressive growth of distributions at RGP.
--Debt/adjusted 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.
Additional information is available at 'www.fitchratings.com'.
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;
-- 'Top 10 Comparisons of REITs and MLPs', April 16, 2013;
--'The Top Ten Differences Between MLP and Corporate Issuers', Feb. 19, 2013;
--'2013 Outlook: Midstream Services and MLPs', Nov. 29, 2012.
Applicable Criteria and Related Research
The Top Ten Differences Between MLP and Corporate Issuers
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
Top 10 Comparisons of REITs and MLPs
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Mark C. Sadeghian, CFA