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Rating Action:

Moody's changes Energy Transfer's outlook to negative

07 Jul 2020

New York, July 07, 2020 -- Moody's Investors Service, ("Moody's") changed Energy Transfer Operating, L.P.'s (ETO) outlook to negative from stable while affirming its Baa3 senior unsecured rating, its P-3 commercial paper rating, its Ba1 junior subordinated notes rating and its Ba2 preferred stock ratings.

"The change in Energy Transfer Operating's outlook to negative is in response to the US District Court ruling ordering that its 38% owned and operating Dakota Access Pipeline (Dakota Access) be shut down during a court-ordered environmental review that is expected to extend into mid-2021," commented Andrew Brooks, Moody's Vice President. "This negative event only exacerbates the company's increased leverage expected in 2020 as a result of weak EBITDA and elevated debt levels."

Outlook Actions:

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

....Outlook, Changed To Negative From Stable

Affirmations:

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

....Junior Subordinated Regular Bond/Debenture, Affirmed Ba1

....Backed Senior Unsecured Shelf, Affirmed (P)Baa3

....Preferred Stock, Affirmed Ba2

....Commercial Paper, Affirmed P-3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

RATINGS RATIONALE

The US District Court for the District of Columbia has ruled that a federal permit granted by the US Army Corp of Engineers (USACE) that permitted Dakota Access to cross North Dakota's Lake Oahe fell short of National Environmental Policy Act requirements, and that the pipeline must cease operations effective August 5 while the USACE conducts a full Environmental Impact Statement (EIS). The EIS will be a broader study than the Environmental Assessment undertaken earlier by the USACE in support of its granting a required easement to the pipeline, which enabled it to enter commercial service in June 2017. The court ruling will likely be appealed, prolonging the litigation. Dakota Access's 570,000 barrels per day (bpd) of capacity is fully contracted under take-or-pay conditions that provide for 469,000 bpd of minimum volume commitments.

The potential loss of up to a year's EBITDA derived from ETO's 38% ownership of Dakota Access will exacerbate earnings weakness already anticipated in 2020 resulting from covid-related supply and demand shocks to domestic energy markets. Energy Transfer has guided 2020's EBITDA to a range of $10.6 - $10.8 billion, at its midpoint a 4.5% decline over 2019. Weakness is particularly acute in ETO's liquids pipeline transportation segments, specifically crude oil and refined products, whose throughput is exposed to volumetric declines. Although 85% fee-based, midstream gathering and processing (G&P) will also likely register declines in EBITDA. Natural gas gathering remains vulnerable to volumetric declines, while processing profitability is exposed to both volumetric and commodity price risk depending on contract structures. The broad-based energy sector is struggling in 2020 under the weight of weak commodity prices, volumetric declines and a declining counterparty credit profile, from which midstream energy is not wholly immune.

Moody's expects that declining EBITDA as projected for 2020 will reverse the recent trajectory of ETO's improved leverage metrics. On proportionately consolidated debt approximating $52 billion, Moody's expects ETO's leverage to revert back to around 5.5x in 2020. The potential loss of Dakota Access EBITDA, and the cost of ETO's pro rata share of supporting the pipeline's operations and debt service could further increase leverage to a level approaching 6x. The company has articulated a goal of reducing consolidated leverage down to a range of 4.0x-4.5x (proportionately consolidated). While encouraging, Moody's now sees this as being made that much more difficult to achieve given 2020's earnings weakness and the uncertainty around Dakota Access.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Energy Transfer Operating of the deterioration in credit quality it has triggered, given its exposure to ongoing Dakota Access litigation risk, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions. The breadth and severity of crude oil demand and supply shocks has had a negative impact on the operations of many midstream energy companies. Dakota Access is also subject to the risk that heightened concern regarding climate change will further tighten the regulation of oil and gas operations and its attendant infrastructure needs. Tightened emission regulations and stricter approval processes for projects for environmental and other social license reasons in certain regions can pose an added burden to pipeline operators.

ETO's outlook is negative. The outlook could be changed to stable should an unappealable ruling permitting Dakota Access to operate be issued, and with ETO's leverage returning towards 5x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

ETO's rating could be downgraded should its debt/EBITDA remain above 5x. The rating could be upgraded if the company reduces consolidated debt/EBITDA (proportionately consolidated) below 4.5x with strong distribution coverage remaining in the 1.8x area.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Energy Transfer Operating, L.P., headquartered in Dallas, Texas, owns and operates a broad array of midstream energy assets. ETO is controlled by Energy Transfer LP. (ET, not rated), which holds the general partner interest in ETO.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.
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