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
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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
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