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Global Credit Research - 12 May 2010
Approximately $608 million of rated debt securities affected
New York, May 12, 2010 -- Moody's Investors Service affirmed Regency Energy Partners LP's
ratings and changed the rating outlook to positive from stable.
This action is in response to its announcement that Regency's general
partner (GP) sponsor, an affiliate of GE Energy Financial Services,
has sold its interest in Regency's GP to Energy Transfer Equity,
L.P. (ETE, Ba1) for $300 million and that concurrently
Regency was purchasing a 49.9% stake in Midcontinent Express
Pipeline LLC (MEP, Ba1) from ETE. Ratings affirmed include
Regency's Ba3 Corporate Family Rating, Ba3 Probability of
Default Rating, SGL-3 speculative grade liquidity rating,
and B1 (LGD 5, 80%) ratings on its senior unsecured notes.
The ratings affirmation and positive outlook reflect the expected benefits
to Regency from the MEP acquisition, including increased scale and
diversification, with a greater proportion of fee-based revenues,
which helps mitigate the risks associated with the change in sponsorship
from financially stronger GE to ETE. There is a degree of uncertainty
regarding the company's future growth strategy and financial policies
under ETE's control. In addition, near-term
financial leverage could be elevated and the transactions involve a level
of structural complexity.
GE is selling its ownership in Regency's GP to ETE for $300
million in preferred units in ETE. As a result, ETE will
own the 2% GP interest in Regency and all of Regency's incentive
distribution rights (IDRs). ETE will also be Regency's largest
LP unit holder, with an approximately 22% ownership stake.
ETE is a publicly traded partnership that currently owns approximately
one-third of Energy Transfer Partners, L.P.'s
(ETP, Baa3) limited partner (LP) units outstanding, as well
as a 1.8% GP interest and all of ETP's IDRs.
ETP and Regency are expected to operate as separate entities.
Regency is purchasing ETE's 49.9% stake in MEP for
approximately $600 million in equity, which will be issued
directly to ETE. Regency has also assumed $86 million in
capital contribution obligations to MEP to finish its expansion.
Any cost overruns on the expansion would be borne by ETE. MEP is
a joint venture with Kinder Morgan Energy Partners (Baa2) consisting of
a 507 mile interstate natural gas pipeline that originates in Oklahoma
and terminates at Transco Station 85 near Butler, Alabama.
Kinder Morgan is the operator of the line. MEP was placed into
service in August 2009 and its current expansion is expected to be placed
in service in August 2010, barring any delays (regulatory approvals
have been obtained).
Regency's Ba3 rating had factored in its ownership from financially
strong GE and Regency's track record in issuing equity under its
ownership by GE. With the change in sponsorship, there is
a degree of uncertainty regarding Regency's future direction,
including distribution growth policies. ETE, being a publicly
traded partnership, makes Regency's distributions to its GP
in effect a fixed and growing cash requirement, thus posing potential
dividend pressure on Regency to meet ETE's distributions.
Moreover, ETE has its own debt obligations, which are serviced
solely by distributions (from both ETP and Regency). Moody's
notes that ETE has considerable midstream operating experience.
We also note that GE is expected to retain a significant stake in Regency,
owning approximately 21% of Regency's LP units and will have
the right to name two board members (based on its level of LP ownership).
It is also Moody's understanding that Regency's current management
team will remain in place after the transactions close.
The MEP transaction positively impacts Regency's overall business
risk profile, providing increased scale and diversification,
and MEP's long-term transportation contracts will provide
Regency with a higher proportion of fee-based volumes. MEP
serves an important regional role in moving shale gas production downstream
towards long-haul transmission lines and has 100% of its
firm capacity contracted with an average life of around nine years.
Once its expansion is complete, MEP is expected to contribute to
approximately 20% of Regency's cash flows. However,
MEP is a producer-driven pipeline, with its shipper portfolio
comprised primarily of speculative grade exploration and production companies,
which places uncertainty on the long-term regional demand for the
Regency's leverage profile could be elevated over the near-term.
While the MEP transaction is being conservatively financed with 100%
equity, MEP has its own debt obligations (including operating leases)
that Moody's will include on a pro-rata basis when assessing
Regency's credit profile. In addition, Regency is expected
to initially debt finance its $86 million capital commitment in
MEP and has debt financed its recently announced $92 million purchase
of an additional 7% interest in its RIGS joint venture.
Moody's estimates Regency's debt/EBITDA, pro-forma
for the MEP transaction (including debt financing of the additional capital
requirements at MEP) and its purchase of an additional 7% interest
in RIGS, at approximately 4.8x, as compared to 5.2x
for 2009. Moody's notes that pro forma leverage declines
to 4.5x once the MEP expansion is complete. However,
we believe that there is a risk that financial leverage could remain elevated
over the near-term, as the company pursues growth projects
in its gathering and processing business in the Haynesville Shale and
to a lesser extent in the Eagle Ford Shale, as well as expansion
projects by its RIGS joint venture. While the credit benefits of
the MEP transaction and recently completed RIGS expansion help to somewhat
mitigate the potential for high leverage, equity will continue to
need to be issued upfront and on a regular basis in order to support a
The transactions involve an increased level of structural complexity.
Regency bondholders will not have direct access to over a third of the
company's pro-forma EBITDA due to the joint venture structures
for both MEP and its RIGS system. Cash distributions to Regency
from MEP will be burdened by MEP's own debt service obligations.
In addition, the RIGS joint venture is expected to use debt to finance
In order to be upgraded to Ba2, Regency will need to develop a track
record under ETE's sponsorship as it continues to pursue growth
projects, including successfully maintaining a lower financial leverage
profile (below 4.5x debt/EBITDA and trending towards 4.0x)
and conservatively managing its distribution policies.
The last rating action on Regency was on February 1, 2010 when Moody's
affirmed the company's ratings at Ba3 and changed the outlook to stable
The principal rating methodology used in rating Regency was Moody's
Midstream Energy Companies and Partnerships Industry Rating Methodology,
published in September 2007 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research and
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Headquartered in Dallas, Texas, Regency Energy Partners LP
is a publicly traded master limited partnership engaged in natural gas
gathering, processing, contract compression and transportation.
Corporate Finance Group
Moody's Investors Service
Moody's changes Regency Energy's outlook to positive
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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