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Rating Action:

Moody's rates Energy Transfer's proposed preferred units Ba2, senior notes Baa3

07 Jan 2020

Proposed offering of perpetual preferred units and unsec

New York, January 07, 2020 -- Moody's Investors Service, ("Moody's") assigned Ba2 ratings to Energy Transfer Operating, L.P.'s (ETO) proposed Series F and Series G Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units. Its Baa3 senior unsecured rating, its Ba1 junior subordinated notes rating and its P-3 commercial paper rating are not affected by this action. The rating outlook is stable.

Together with a concurrent proposed offering of senior unsecured notes, which will be rated Baa3, ETO will use the proceeds of the preferred units offering to repay borrowings under its revolving credit facility and to refinance upcoming debt maturities.

Assignments:

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

....Series F Preferred Stock, Assigned Ba2

Series G Preferred Stock, Assigned Ba2

....Senior Unsecured Notes, Assigned Baa3

RATINGS RATIONALE

The proposed preferred units are rated Ba2, two notches below ETO's Baa3 senior unsecured rating, reflecting their subordination to all of the company's existing senior unsecured notes, its unsecured revolving credit facility and its subordinated notes. Moody's attributes 50% equity credit to the preferred units.

ETO's Baa3 rating is supported by its very large consolidated and geographically diversified asset base comprised of crude oil, natural gas and natural gas liquids (NGL) pipeline services and storage, and largely fee-based natural gas midstream gathering and processing (G&P) operations. ETO also holds the general partnership interest and common units in Sunoco LP (SUN, Ba3 stable) and USA Compression Partners, LP (USAC, B1 stable), further adding to overall operational diversity.

ETO ranks among the largest publicly traded midstream master limited partnerships (MLP) in terms of its size, geographic reach and the operational diversification of its businesses. Its $95.2 billion midstream asset base generates a largely fee-based cash flow stream, reporting $11.1 billion of 12-month EBITDA at September 30, 2019. Strong reported EBITDA, up 31% from September 2018's 12-mionth total, equated to approximately 4.8x debt/EBITDA (proportionately consolidated for joint venture debt and non-wholly-owned joint venture EBITDA). Moody's expects that EBITDA growth will moderate in 2020 with several large pipeline projects having recently entered commercial service, although delayed and at higher cost. While ETO has an array of alternative sources of liquidity available to it to reduce leverage through potential asset sales and joint ventures, its focus remains on generating increased EBITDA through the investment of capital in new projects. On December 5, ETO closed on its acquisition of SemGroup Corporation (SEMG) in a $5 billion cash and units transaction, including assumed debt. SemGroup's approximately $2.4 billion of debt assumed by ETO was fully redeemed prior to year-end. Moody's does not believe the SemGroup acquisition will impede progress towards the further deleveraging of ETO.

Regulatory, permitting and political risk for major energy infrastructure projects has been on the rise. The cost of project delays is borne by project owners, ultimately detracting from project returns and delaying receipt of cash flow associated with these investments. Certain regions of the US in particular tend to field more grass roots opposition to the construction of energy infrastructure projects. Regional opposition to the expansion of ETO's Mariner East natural gas liquids pipeline in Pennsylvania has delayed the completion of its construction, increased its costs and restricted its operations. The MLP structure employed by ETO vests considerable influence with the general partner of these entities, who operations are subject to boards of directors appointed by their respective general partners. MLP limited partner unitholders have considerably fewer voting rights than shareholders in a conventional corporate structure, further restricting their influence over MLP governance.

Moody's views ETO to be in a good liquidity position into 2020, enhanced by strong earnings retention. ETO's third quarter and nine-month distribution coverage ratios were 1.88x and 1.98x, respectively, reflecting strong growth in distributable cash flow and a flat distribution rate. Strong distribution coverage should enable ETO to retain somewhat over $3.0 billion in cash which can be contributed to the funding of growth capital spending. ETO has projected 2020 growth capital spending of about $4.0 billion, down about 20% from 2019's spending. In October, ET closed on a new $2.0 billion unsecured term loan, whose proceeds were largely used to repay borrowings outstanding under ETO's $5.0 billion revolving credit facility. At September 30, $2.61 billion was utilized under ETO's revolver, $2.15 billion of which was in commercial paper. The revolver has a December 1, 2023 scheduled maturity date, and is supplemented by a $1.0 billion 364-day credit facility. The 364-day facility had no borrowings outstanding at September 30. ETO and its general partner Energy Transfer LP have a history of consistent support for ETO's investment grade rating, which Moody's expects will continue to be the case.

ETO's outlook is stable based on Moody's assumption that prospective debt leverage will continue to improve towards 4.5x with distribution coverage remaining in the company's projected range of 1.7x-1.9x.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. Should Debt/EBITDA increase above 5x, the Baa3 rating could be downgraded.

The principal methodology used in these ratings was Midstream Energy published in December 2018. 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), which holds the general partner interest in ETO. ET is a publicly traded MLP.

REGULATORY DISCLOSURES

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.

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.
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