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Announcement:

Moody's reviews Energy Transfer Equity for downgrade and comments on related ratings

16 Jun 2011

New York, June 16, 2011 -- Moody's Investors Service placed under review for possible downgrade Energy Transfer Equity, L.P.'s (ETE) Ba1 Corporate Family Rating and Ba2 long-term debt rating. Moody's affirmed Energy Transfer Partners, L.P.'s (ETP) Baa3 senior unsecured note rating but changed ETP's outlook to negative in response to ETE's announcement that it would acquire Southern Union Company (SUG) in a transaction valued at $7.9 billion. Moody's also affirmed the Baa3 long-term debt ratings of SUG and its subsidiary Panhandle Eastern Pipeline (PEPL) with a stable outlook, and affirmed Regency Energy Partners L.P.'s Ba3 Corporate Family Rating with a positive outlook.

RATINGS RATIONALE

The review for downgrade of ETE's Ba1 rating reflects the financing of the acquisition from a position of already strained leverage for the ETE consolidated group, the increase in fixed charges tied to the newly issued Series B preferred units distributions, the degree of execution and integration risk inherent in absorbing operations of SUG's scale, uncertainties over the configuration of operations as ETE seeks to optimize its larger portfolio of assets, and increased structural complexity.

The review will focus on ETE's plans for potential asset dropdowns and the adequacy of the combined distributions from ETP, SUG, and Regency to support ETE's distributions. Moody's views the $4.1 billion of Series B preferred units that will be issued to finance the purchase of SUG's equity as having a high valuation multiple at 10x EBITDA, with mainly a debt-like character. Moody's assigned basket B treatment to the Series B units as a hybrid instrument, with a high fixed coupon charge of 8.25%, reflecting the cumulative distribution feature and low likelihood of distribution deferral of MLP structures.

Moody's estimates ETE's consolidated Debt/EBITDA at well over 6x proforma for the acquisitions of SUG and Louis Dreyfus Highbridge Energy, and remains concerned that the financing for SUG will continue to delay meaningful group leverage reduction, despite the addition of SUG's relatively stable cash generating assets. Moody's believes that ETE's Corporate Family Rating is likely to be lowered to Ba2 when the acquisition and review are completed, which is expected in early 2012.

The change to a negative outlook for ETP's Baa3 rating incorporates the MLP's already elevated leverage at 4.8x EBITDA, a large roster of growth projects with execution and cash flow ramp-up risk, and uncertainty over the leverage and operating risk implications of potential asset dropdowns to ETP after SUG is acquired by ETE. In addition, as the largest contributor to ETE's distribution stream, ETP is affected by the increased group leverage profile and ETE's growing debt service and distribution needs. In effect, dropdowns could merely shift leverage to ETP and not reduce ETE's group leverage.

Moody's will monitor potential dropdown transactions for ETP over the next year, as well as the execution success and rising cash flows from its organic growth projects, to determine whether and when ETP's outlook can be stabilized. ETP's Baa3 rating continues to be supported by its growing asset footprint and record of equity issuance to support growth projects and acquisitions. However, the rating could be lowered in the medium-term if major projects and cash flows are delayed, the business risk profile increases, or if high dropdown multiples and related financing prevent ETP from deleveraging and achieving leverage in the area of 4.5x Debt/EBITDA on a sustained basis.

Moody's is maintaining a stable outlook for SUG's and PEPL's Baa3 long-term debt ratings based on the sizeable stable regulated pipeline revenues, which provide adequate coverage of debt service and maintenance capital and generate free cash flow. Moody's believes the dropdown of some of SUG's assets to ETP and Regency is highly likely given the opportunities to combine its more stable pipeline cash flows with the MLPs' operations and ETE's strong incentive to redeem the high coupon Series B units. In addition, SUG's leverage could be reduced from a portion of asset dropdown proceeds. At the same time, Moody's notes SUG will be controlled by a leveraged entity and that the Series B distributions will be a high call on SUG's free cash flow. If dropdowns of SUG's assets and redemptions or conversions do not substantially reduce ETE's Series B units, or SUG's leverage increases due to spending for growth projects, its Baa3 rating could be pressured.

Regency faces uncertainty similar to ETP's concerning dropdowns, an evolving operating risk profile, and elevated leverage. However, Moody's is maintaining a positive outlook on Regency's Ba3 Corporate Family Rating, despite its smaller scale, reflecting its growing business scale and diversification. Moody's will assess the impact of potential dropdowns on Regency's leverage and its progress in generating more sustainable cash flows to determine whether the Ba3 rating can be upgraded or its outlook stabilized.

Please see ratings tab on issuer/entity page on Moodys.com for the last rating action and the rating history.

The principal methodology used in rating Energy Transfer Equity (ETE) was the Global Midstream Energy Industry Methodology, published December 2010 and Natural Gas Pipeline Industry Methodology, published December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA, published June 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

New York
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's reviews Energy Transfer Equity for downgrade and comments on related ratings
No Related Data.
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