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Rating Action:

Moody's affirms Energy Transfer Partners at Baa3, negative outlook; reviews Energy Transfer Equity's ratings for upgrade

02 Aug 2018

Approximately $34 billion of rated debt affected

New York, August 02, 2018 -- Moody's Investors Service ("Moody's") affirmed the ratings of Energy Transfer Partners, L.P. (ETP), including its Baa3 senior unsecured ratings, Ba1 junior subordinated debt rating, Ba2 preferred stock rating and its Prime-3 short term rating. Additionally, Moody's placed the ratings of Energy Transfer Equity, L.P. (ETE) under review for upgrade, including the Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR) and the Ba2 senior secured ratings. ETP's outlook remains negative. Energy Transfer Equity's SGL-3 liquidity rating remain unchanged.

These actions follow the announcement by ETE, ETP's general partner, that it has agreed to acquire all of the public outstanding common units of ETP in exchange for ETE units in an all unit-for-unit transaction. The transaction is valued at approximately $28 billion and will effectively consolidate ETE and ETP, with ETE the sole publicly traded company and the primary entity for raising capital to fund the combined company's growth going forward.

"This simplification transaction, which, with the projected elimination of ETE's Incentive Distribution Rights (IDRs), will relieve ETP of the growing IDR burden on its cost of capital, while enabling it to retain a significantly greater amount of cash flow with which to fund its future growth," commented Andrew Brooks, Moody's Vice President. "The combined entities' extremely large and diversified midstream asset base, generating largely fee-based cash flows should enable the company to manage its financial leverage to a modestly lower level while sustaining high levels of distribution coverage."

On Review for Upgrade:

..Issuer: Energy Transfer Equity, L.P.

.... Probability of Default Rating, Placed on Review for Upgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Upgrade, currently Ba2

....Senior Secured Term Loan, Placed on Review for Upgrade, currently Ba2 (LGD3)

....Senior Secured Notes, Placed on Review for Upgrade, currently Ba2 (LGD3)

Outlook Actions:

..Issuer: Energy Transfer Equity, L.P.

....Outlook, Changed To Rating Under Review From Negative

..Issuer: Energy Transfer Partners, L.P.

....Outlook, Remains Negative

Affirmations:

..Issuer: Energy Transfer Partners, L.P.

....Junior Subordinated Notes, Affirmed Ba1

....Pref. Stock Preferred Stock, Affirmed Ba2

....Senior Unsecured Notes, Affirmed Baa3

....Commercial Paper, Affirmed P-3

RATINGS RATIONALE

Moody's will conclude the review of ETE's ratings upon closing of the merger, currently anticipated to occur in 2018's fourth quarter, subject to standard closing conditions, including the approval by a majority of unaffiliated ETP unitholders. Moody's expects that following the closing of the transaction, the liens securing ETE's secured notes will be released and that its then unsecured ratings would likely be upgraded to Baa3 with a stable outlook at the conclusion of the review. Based on the announced terms of the transaction, Moody's further expects that the debt of ETE and ETP will become pari passu through guarantees or other means.

For ETP's senior unsecured creditors, the benefits of the merger to the consolidated credit profile will be offset by losing their structurally superior position in the capital structure relative to ETE's creditors. Conversely, ETE's current secured creditors will benefit from becoming pari passu with ETP's creditors, although losing the liens securing their debt, as opposed to their present structurally subordinated position, resulting in the anticipated upgrade of ETE's debt to Baa3.

From the perspective of the consolidated credit profile, the acquisition of ETP in an all equity transaction will reduce structural complexity, enhance corporate transparency, and further grow scale and business segment diversity. The combined entity will have strong distribution coverage metrics and the corresponding ability to internally fund a meaningful portion of its growth capital expenditures. This will result in less reliance on equity capital markets to fund growth expenditures while correspondingly providing for sounder liquidity. Beyond generating combined credit metrics presumed to be supportive of a Baa3 ratings outcome, Moody's also assumes in particular that ETP's Rover natural gas pipeline and its Mariner East 2 natural gas liquids (NGLs) pipeline will be fully operational, with any associated construction, regulatory and/or permitting issues having been resolved in a manner that supportively underpins the economics of these two very large project investments.

Following the closing of the transaction, the likely Baa3 senior unsecured rating would be supported by the companies' very large and geographically diversified $83 billion asset base comprised of crude oil, natural gas and NGL pipeline services and storage, and largely fee-based natural gas midstream gathering and processing (G&P) operations. ETE's general partnership interests in Sunoco LP (Ba3 stable) and USA Compression Partners, LP (B1 stable) will remain outstanding, further adding to combined overall operational diversity. In addition to Rover and Mariner East, an array of other project investments should add incremental EBITDA growth, leading to a modest decline in the trajectory of relative debt leverage.

Following the completion of the merger transaction, we expect the rating outlook to be stable based on Moody's expectation that consolidated Debt/EBITDA will decline to slightly below 5x in 2019. The anticipated Baa3 rating could be upgraded in the future if the company reduces consolidated Debt/EBITDA below 4.5x with strong distribution coverage remaining in the 1.8x area. Should Debt/EBITDA remain above 5x, the Baa3 rating could be downgraded.

The principal methodology used in these ratings was Midstream Energy published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Energy Transfer Equity and Energy Transfer Partners are headquartered in Dallas, Texas, and rank among the largest publicly traded midstream master limited partnerships (MLP) in terms of size, geographic reach and the operational diversification of its businesses.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrew Brooks
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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