ENERGY TRANSFER LP
Fitch Ratings has assigned a 'BBB-' senior unsecured rating to
The notes will rank on parity with ET's existing senior unsecured notes. Proceeds from the offering are expected by Fitch to primarily repay outstanding indebtedness.
ET's Long-Term Issuer Default Rating (IDR) is 'BBB-', and its Rating Outlook is Stable.
ET's ratings reflect the partnership's large scale, diverse assets and leverage, which strongly positions it in its rating category. Rating concerns include volumetric risk, counterparty credit risk, and the potential for adverse rulings (from a court or regulator) regarding the Dakota Access Pipeline asset (DAPL).
Key Rating Drivers
Balanced Segments: More than its other large peers, ET has a combination of balance and focus on hydrocarbons. The company has five operating segments (excluding the segments that are investee master limited partnerships), which are all hydrocarbon segments. All five have run-rate EBITDA of over
The combination of large hydrocarbon segments is unusual in the sector. Fitch expects this segment profile provides a diversification benefit and opportunity to achieve high levels of execution. The
Stable Cash Flows: Fitch expects ET to maintain a high level of fee-based or hedged cash flow in excess of 85% on a run-rate basis, which is enhanced with the full year contribution of Enable. As ET has grown its asset base, the percentage of gross margin supported by fee-based contracts has increased, with the partnership moving toward being largely fee-based or hedged, due in part to new projects coming online with heavy fee-based components.
Remnant Dakota Access Uncertainty: ET operates DAPL and is a leader in the system's expansion. None of ET's partners in DAPL have a larger percentage of indirect ownership. Although DAPL has operated for approximately five years, it still faces a litigation challenge. In two instances in 2021 the Biden administration made ministerial moves to lessen DAPL's vulnerability, which Fitch views as positive. In early 2021, the administration informed a federal district judge that it would not soon be moving to try to halt DAPL's operation; later in the year, it informed the same judge that it was working on the judge's requirement for the evaluation of a more comprehensive permitting document than the extant document.
Following the ongoing proceedings at the federal district court, DAPL's request of the
While DAPL has operated without any material incident during its life, Fitch believes its litigated permit status elevates the risk of any possible incident, such as a spill into a waterway. While DAPL's shutdown is not expected in Fitch's rating case, Fitch projects that ET's credit profile could absorb the financial impacts of a meaningfully adverse ruling on DAPL.
Strong Leverage Position: Fitch's forecast shows a 2022 ratio of total debt with equity credit to adjusted EBITDA (Fitch definitions) to be one that positions ET strongly in its rating category as to leverage. Fitch has previously stated that leverage (on the Fitch calculation) at or below 4.5x potentially could drive a positive rating action of some type.
The Fitch price deck somewhat suppresses Fitch's expectations for ET EBITDA against other forecasters. ET's policy is for leverage (ET calculation, which is different that Fitch's) to be in the 4.0x-4.5x range, which Fitch views positively. Fitch calculated leverage in fiscal 2021 was 4.3x, reflecting the strong profits the company enjoyed during the
Derivation Summary
ET's ratings reflect the company's size and diversity. Leverage for the partnership at LTM 1Q21 is currently low for its multi-year history. Fitch forecasts 2022 leverage will be meaningfully below 5.0x. In size and diversity, the partnership is comparable to
KMI has a lower historical profile for leverage and more stable cash flows, which drives the one-notch separation. KMI is expected to have leverage closer to 4.5x in fiscal
Key Assumptions
Fitch Price Deck, e.g., 2022 WTI
Annual distributions are higher over the forecast than 2021 levels;
Dakota Access Pipeline continues to possess permits that allow it to operate;
Growth capex and investments in joint venture capex shows an annual run-rate that represents a decline over the 2020-2021 annual average.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Total debt with equity credit to operating EBITDA expected to be sustained at or below 4.5x on a consolidated basis;
Divestment of large portions of the company that have higher-than-company-average business risk;
Extensive success in re-contracting pipelines to both extend weighted average contract life and increase take-or-pay contract profile (or similar revenue assurance structure) (with strong counter-parties), without cutting medium-term rates.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total debt with equity credit to operating EBITDA on a consolidated basis expected to be sustained at or above 5.5x;
Unwillingness to fund growth capital needs in a credit-friendly manner;
Increasing commodity exposure above 30% (run-rate basis, i.e., not reflective of a super-spike in commodity prices), or other large increase in aggregate business risk) could lead to a negative rating action if leverage were not appropriately decreased to account for increased earnings and cash flow volatility;
An adverse ruling at DAPL that impacts ET's credit profile.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Liquidity Adequate: As of
On a consolidated basis, Fitch forecasts that ET has
Issuer Profile
Summary of Financial Adjustments
As per Fitch's 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' sector-specific criteria, Fitch treats the subordinated debt and preferred securities for ET and PEPL as 50% debt and 50% equity. Referenced leverage metrics are adjusted as follows: consolidated balances and flows are used; distributions from investees accounted for under the equity method of accounting are included in EBITDA; and equity earnings from these entities are excluded. Fitch removes from ET EBITDA the net income attributable to non-controlling interests. Fitch looks at a variety of leverage calculations but features the foregoing calculation in its commentary.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
ET has an ESG Relevance Score of '4' for 'Human Rights, Community Relations, Access & Affordability' (this is a 'Societal' item in the ESG array). The part of this item is 'Community Relations.' DAPL litigation has had negative impacts on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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