July 25, 2016 - 3:53 PM EDT
Print Email Article Font Down Font Up
Fitch Affirms Sunoco Logistics' Ratings at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the ratings on Sunoco Logistics Partners L.P. and its operating partnership, Sunoco Logistics Partners Operations L.P. (both entities collectively referred to as Sunoco Logistics) as follows:

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'.

Debt issued by Sunoco Logistics Partners Operations L.P. is guaranteed by Sunoco Logistics Partners L.P. The Rating Outlook for both entities is Stable. Approximately $6.0 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 partnership's EBITDA;

--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 leverage to remain around 4.5x in the near term given significant spending for organic growth projects;

--Volatility and working capital needs associated with market-related operations;

--Potential for changes in strategy including a more aggressive business strategy or financial policy.

Energy Transfer Partners L.P. (ETP; IDR 'BBB-'/Stable Outlook) owns the general partner interest and a 24.7% of limited partnership interest in Sunoco Logistics. Energy Transfer Equity, L.P. (ETE; IDR 'BB'/Stable Outlook) owns Sunoco Logistics Class H units which track 90% of the GP interest and the IDRs of Sunoco Logistics.

Sunoco Logistics has additional opportunities for growth given ETE's significant size and scope. Furthermore, Sunoco Logistics will be able to increase its asset diversity and as well as its geographic diversity. Examples of Sunoco Logistics' growth projects associated with the Energy Transfer family include the Bayou Bridge Pipeline, a joint project 30% owned by Sunoco Logistics. The first segment of this pipeline project began operations in the second quarter of 2016. The second segment is scheduled to be in service in late 2017. The other significant project is the Bakken Pipeline which is also 30% owned by Sunoco Logistics. This is to be in service at the end of 2016.

Concerns include higher leverage in 2015 and into 2016 due to higher spending on projects. However, the projects are backed by long-term contracts which will generate consistent and steady cash flows. Catalysts which could prompt negative rating action include a change in Sunoco Logistics' financial policies such as funding growth with debt which could result in significantly higher leverage. Fitch believes that Sunoco Logistics will maintain conservative financial policies but that they may evolve.

Diversified Asset Base: Sunoco Logistics benefits from a mix of fee-based assets consisting of crude oil pipelines, product pipelines, and product and crude oil terminal facilities. Sunoco's latest 12 months (LTM) first quarter 2016 (3Q15) adjusted EBITDA was nearly $1.3 billion. Contributions to EBITDA were the following: 56% crude oil, 30% natural gas liquids, and 14% from refined products.

Leverage: At March 31, 2016, leverage (as defined by Fitch as debt-to-adjusted EBITDA) was 4.7x, down from 4.9x at the end of 2015. Higher debt associated with increased growth capital spending accounted for the uptick in leverage since the end 2014. Fitch expects to see leverage in the range of 4.3x - 4.8x at the end of 2016. Failure for Sunoco Logistics to reduce adjusted leverage below 4.5x in 2017 and on a sustained basis may cause Fitch to take negative rating action.

Capital Expenditures: Sunoco Logistics has stated that its 2016 expansion capex budget is to be significantly reduced from the prior forecast of $2.5 billion although a revised number has not yet been disclosed. The new forecast should be below the $2.6 billion spent on growth in 2015 and the $2.5 billion spent in 2014. Fitch views the bulk of Sunoco Logistics' capital spending as low-risk since projects are supported by contractual commitments for capacity.

Distributable Cash Flow and Coverage: Distributable cash flow (DCF) generated in the LTM ending 1Q16 was roughly $1.0 billion, up from $879 million in 2015. The distribution coverage remained strong at 1.3x for the LTM, but below even stronger coverage seen historically when Sunoco Logistics generated higher levels of cash flows from market related activities versus more fee-based cash flows. The partnership targets distribution coverage of 1.0x on its fee-based cash flows. Cash flows from market-related activities enhance the coverage ratio.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Sunoco Logistics include the following:

--EBITDA and distributable cash flows increase in 2016 given new projects coming online including Mariner East 1 (ethane and propane) in 1Q16, Bayou Bridge Lake Charles in 2Q16, the Permian Longview and Louisiana Extension in mid-2016, and the Delaware Basin Extension in mid-2016. The Bakken pipeline is scheduled to come into service in 4Q16 which should also benefit 2016 results to some extent.

--EBITDA growth continues in 2017 given the benefit of new projects. This should result in reduced leverage in 2017.

RATING SENSITIVITIES

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 sustained basis. Fitch recognizes that recent adjusted leverage has been above this and attributes the increase to higher spending. Importantly, Fitch anticipates that leverage should decrease in 2017.

--Increased exposure to market-sensitive businesses and other more volatile operations without offsetting adjustments.

LIQUIDITY

Sunoco Logistics has sufficient liquidity. At the end of 1Q16, it had approximately $1.6 billion of liquidity which consisted of $43 million of cash and nearly $1.6 billion undrawn on its revolver due 2020. The partnership also has a $2.5 billion commercial paper program which is backed by the revolving credit facility.

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 1Q16, bank defined leverage was 3.5x, leaving significant cushion for the bank covenant. In May 2016, Sunoco Logistics paid off $175 million of debt which became due. Future maturities are manageable and the next bond maturity is $250 million due in 2020.

FULL LIST OF RATINGS

Fitch affirms the following 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';

--Commercial Paper (CP) at'F2'.

The Rating Outlook for both entities is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009450

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009450

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Joan Okogun
Senior Director
+1-212-908-1384
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]


Source: Business Wire (July 25, 2016 - 3:53 PM EDT)

News by QuoteMedia
www.quotemedia.com

Legal Notice