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Rating Action:

Moody's reviews Crosstex Energy's ratings for upgrade

Global Credit Research - 21 Oct 2013

Approximately $975 million of rated debt affected

NOTE: On November 08, 2013, the press release was revised as follows: Added "B1-PD Probability of Default Rating (PDR)" in the first sentence of the first paragraph. Revised release follows.

New York, October 21, 2013 -- Moody's Investors Service placed Crosstex Energy LP's (Crosstex) B1 Corporate Family Rating (CFR), B1-PD Probability of Default Rating (PDR), and B2 senior unsecured notes rating on review for upgrade following the signing of definitive agreements to combine substantially all of Devon Energy's (Devon, Baa1 negative) US midstream assets with Crosstex's assets to form a new midstream business. The new business will consist of two publicly traded entities: the Master Limited Partnership and a General Partner entity (collectively the New Company). A name for the New Company will be announced prior to the closing of the transaction which is targeted in the first quarter of 2014, subject to shareholder approvals and customary closing conditions.

"The combined company's midstream assets significantly expands Crosstex's size, scale and geographic diversification," stated Michael Somogyi, Moody's Vice President -- Senior Analyst. "The New Company will also stand to benefit from strong sponsor support from Devon, its largest customer, with a large inventory of organic exploration and development opportunities, increasing focus on liquids-based growth projects, fixed-fee contract structure and minimum volume commitments."

RATINGS RATIONALE

This transaction combines Devon's large Texas and Oklahoma midstream platform with Crosstex's positions in the Barnett Shale, Permian Basin, Eagle Ford, Haynesville, Gulf Coast, Utica and Marcellus. The combination creates a geographically diverse portfolio of midstream assets, comprised of approximately 7,300 miles of gathering and transportation pipelines, 13 processing plants with 3.3 Bcf/day of net processing capacity, 6 fractionators with 165 MBbl/day of net fractionation capacity, as well as barge and rail terminals, product storage facilities, brine disposal wells and an extensive crude oil trucking fleet.

This combination looks to capitalize on Devon and Crosstex's long history of working together while accelerating Devon's midstream expansion plans and Crosstex's transformation to a more geographically diversified and fee-based midstream company. Devon, with its strong upstream development portfolio, will be the New Company's largest customer and will dedicate nearly 800,000 net acres to the New Company in areas where it expects to develop liquids-driven upstream opportunities. Devon's asset contribution is further underpinned by 10-year fixed-fee contracts and 5-year minimum volume commitments that will provide volume stability and support cash flow visibility.

With combined 2014 adjusted EBITDA projected to be around $700 million (before $45 million in expected synergies), the New Company's pro-forma leverage will be around 1.5x and distribution coverage per unit will be around 1.5x at the GP and 1.1x at the MLP. The New Company will also be better positioned to pursue additional growth opportunities over and above the $1 billion of growth projects Crosstex currently has underway.

Our rating review of Crosstex will focus on the combined company's assets, cash flow and capital structure. Devon and Crosstex expect to recapitalize the company with a new, expanded bank credit facility and refinance Crosstex's outstanding senior unsecured notes. Should Crosstex's notes be refinanced following close of the transaction, Moody's will withdraw the existing ratings on Crosstex.

Under the terms of the definitive agreements, in exchange for a controlling interest in both the new General Partner (GP) entity and the Master Limited Partnership (MLP), Devon will contribute its equity interest in a newly formed Devon subsidiary (Devon Holdings) and $100 million in cash. Devon Holdings will own Devon's midstream assets in the Barnett Shale in North Texas, the Cana and Arkoma Woodford Shales in Oklahoma and Devon's interest in Gulf Coast Fractionators in Mt. Belvieu, Texas. The Master Limited Partnership and the General Partner will each own 50% of Devon Holdings. Current stockholders of Crosstex Energy Inc. will receive one unit in the General Partner entity for each share of Crosstex Energy Inc. they own, as well as a one-time cash payment at closing of approximately $2.00 per share or $100 million in aggregate. Devon's contributed assets are valued at $4.8 billion in the transaction.

Crosstex's B1 Corporate Family Rating is supported by the relatively high proportion of its gross margin that is considered non-commodity based and management's conservative business strategy in recent years, which we expect to remain in place as the company pursues strategic growth opportunities. The rating is restrained by Crosstex's high level of exposure to the relatively mature Barnett Shale, and inherent volume and price risk in gathering and processing natural gas. The rating further reflects the expected increase in financial leverage over the near-term to fund increased growth spending and the risks inherent to the MLP business model.

Crosstex's debt/EBITDA leverage metric (as adjusted by Moody's) stood at 5.3x as of June 30, 2013, up from 4.3x a year earlier, driven by acquisitions and large, upfront capital spending on growth projects. The largest component of these projects has been the expansion of the Cajun-Sibon NGL pipeline in Louisiana, with Phase I of the expansion completed with volumes to ramp up to full capacity in the fourth quarter. Earnings across its Ohio River Valley assets were also expected to support deleveraging efforts over the next 12 -- 18 months.

The principal methodology used in this rating was the Global Midstream Energy Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Crosstex Energy, L.P., headquartered in Dallas, Texas, is a publicly traded master limited partnership.

Devon Energy Corporation is an Oklahoma City-based independent energy company engaged in oil and gas exploration and production.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Michael Somogyi
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's reviews Crosstex Energy's ratings for upgrade
No Related Data.

 

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