Fitch Expects to Rate Sunoco Logistics' CP 'F2'; Affirms IDR & Sr. Unsecured at 'BBB'
Fitch Ratings expects to assign a rating of 'F2' to Sunoco Logistics
Partners L.P.'s (Sunoco Logistics) proposed commercial paper (CP)
program. The CP is to be issued by Sunoco Logistics Operations L.P. and
guaranteed by Sunoco Logistics Partners.
Sunoco Logistics plans to put in place a $2.5 billion CP program that
back-stopped by the partnership's $2.5 billion revolving credit
facility, which matures in 2020. The CP will rank pari passu with the
partnership's senior unsecured debt.
Fitch has also affirmed the following existing ratings:
Sunoco Logistics Partners L.P.
--Long-term Issuer Default Rating (IDR) at 'BBB'.
Sunoco Logistics Partners Operations L.P.
--Long-term IDR at 'BBB;
--Senior unsecured debt at 'BBB';
--Senior unsecured bank facilities at 'BBB';
--Short-term IDR at 'F2'.
The Rating Outlook for both entities is Stable. Approximately $4.6
billion in debt is affected by today's rating action.
KEY RATING DRIVERS
Sunoco Logistics' rating is supported by the following strengths:
--Large diversified asset base that serves high-demand markets;
--Stable, fee-based operations that account for a majority of the
--Growth projects which are planned and in development that will provide
Sunoco Logistics with additional long-term fee-based cash flows;
--Supportive financial credit metrics including a strong distribution
coverage ratio which indicate a less aggressive capital structure
relative to its peers with similar ratings.
The ratings also factor in the following concerns:
--Expectations for a temporary increase in leverage in 2015 and 2016 as
significant spending pressures credit metrics;
--Volatility and working capital needs associated with market-related
Diversified Asset Base: Sunoco Logistics benefits from a mix of
fee-based assets consisting of crude oil pipelines, refined product
pipelines, and natural gas liquids pipelines, as well as refined product
and crude oil terminal facilities. Sunoco's 2014 adjusted EBITDA was
$971 million and comprised: 39% crude oil pipelines, 17% crude oil
acquisition and marketing, 36% terminal facilities, and 8% from refined
The crude oil pipelines are located mostly in Oklahoma and Texas, and
have 5,300 miles of trunk pipelines and 500 miles of crude oil gathering
lines which supply the trunk pipelines. This segment should see
significant growth going forward given the number of projects underway.
The crude oil acquisition and marketing business gathers, purchases,
markets and sells crude primarily in the mid-continent.
The terminals facilities have oil and refined products storage capacity
of 48 million barrels including 25 million barrels of storage at
Nederland, TX, 3 million at Marcus Hook, PA (refined products and
natural gas liquids terminal), 39 refined product terminals in the
northeast, midwest and southwest. It also has several refinery terminals
in the northeast.
The refined products pipelines have 2,400 miles of refined products
pipelines and joint venture interest in four such pipelines. This
segment should also see substantial growth in the future due to natural
gas liquids (NGL) pipeline projects that are currently being developed
including Sunoco Logistics' Mariner projects.
The crude oil acquisition and marketing segment purchases crude from the
wellhead and other locations and then sells it at various locations.
Delivery occurs through its fleet of over 300 trucks, through its own
pipelines and via third party pipelines.
Leverage: At June 30, 2015, leverage (as defined by Fitch as
debt-to-adjusted EBITDA) was 4.1x, down from 4.4x at the end of 2014.
EBITDA growth particularly in 2Q15 helped reduce leverage for the LTM.
Capital Expenditures: Sunoco Logistics expects 2015 expansion capex to
be at least $2.5 billion. This figure was recently revised upward by
$500 million following the partnership's announcement that it has
acquired a 30% stake in a Bakken crude oil pipeline from Energy Transfer
Partners L.P.(ETP; IDR: 'BBB-'/Stable Outlook). The current year's
budget is slightly above 2014's spending of $2.4 billion. Fitch believes
the bulk of Sunoco Logistics' capital spending is to be done on
generally low-risk projects supported by contractual commitments for
Distributable Cash Flow and Coverage: Distributable cash flow (DCF)
generated in the LTM ending 2Q15 was $793 million, up from $750 million
in 2014. The distribution coverage was strong at 1.37x. Fitch believes
the current coverage ratio is high and will likely decline as
distributions continue to grow. In recent years, the year-end coverage
ratio ranged from a high of 2.4x in 2012 to a low of 1.3x in 2010.
Opportunities from its Sponsor: The partnership's sponsor, ETP has its
own substantial projects and Sunoco Logistics is expected to benefit
from its affiliation with ETP. Sunoco Logistics and ETP have recently
announced that Sunoco Logistics will now have a 30% stake in the Bakken
Pipeline project which is jointly owned with ETP and Phillips 66. Sunoco
Logistics is expected to operate the completed pipeline.
ETP owns the general partner interest, 10% of the incentive distribution
rights and a 27% limited partnership interest in Sunoco Logistics.
--EBITDA exceeds $1 billion in 2015 and increases significantly after
that given large new projects scheduled to come on line;
--Growth capex in the current year approximates $2.5 billion and
maintenance capex is $70 million;
--In 2015, proceeds from debt and equity issuances will be used to fund
spending in a balanced manner to protect the balance sheet.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--Positive rating action is not expected at this time. Leverage would
need to be reduced to below 3.0x on a sustained basis.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Leverage (defined as debt-to-adjusted EBITDA) in excess of 4.5x on a
--Increased exposure to market-sensitive businesses and other more
volatile operations without offsetting adjustments.
At the end of the second quarter 2015 (2Q15), Sunoco Logistics had
approximately $2 billion of liquidity which consisted of $58 million of
cash and nearly $2 billion undrawn on its revolver.
In March 2015, the partnership entered into a new five-year $2.5 billion
revolver due 2020 which replaced a $1.5 billion revolving credit
facility due 2018. The revolver limits leverage (as defined by the bank
agreement) to 5.0x at the end of each quarter. With certain
acquisitions, leverage could temporarily increase to 5.5x. The bank
definition of EBITDA gives pro forma credit for acquisitions and
material projects. The definition of debt carves out borrowings used for
contango trades up to $500 million.
As of the end of 2Q15, bank defined leverage was 3.3x, leaving
significant cushion for the bank covenant. Maturities are manageable and
the next bond maturity is $175 million due in 2016.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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