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Credit FAQ: What Would It Take To Upgrade Energy Transfer L.P. To 'BBB'?

Diversified midstream energy partnership Energy Transfer L.P. (ET) continues to prioritize balance sheet improvement and free cash flow generation. As a result, in December we revised the outlook to positive from stable and affirmed our 'BBB-' issuer credit rating on the company. In this report, the fifth in a series on ET's financial developments, we answer frequently asked investor questions we received since the outlook revision. For a list of other reports in the series, see Related Research below.

Frequently Asked Questions

How does S&P Global Ratings view the redemption of hybrid securities?

Energy Transfer has two preferred securities ($440 million Series C; and $434 million Series D) with upcoming rate-reset periods later this year. These securities are callable on their rate-reset date. All else unchanged, when an issuer doesn't replace a hybrid security with another hybrid or issue new common equity, we may still regard the remaining outstanding hybrids as having intermediate equity content under certain circumstances. Energy Transfer has over $6.05 billion of preferred units and $600 million in junior subordinated debt, all of which receives 50% equity treatment in our calculation of S&P Global Ratings-adjusted financial ratios. A redemption would not cause us to revisit our intermediate treatment on the remaining hybrids in the capital structure if:

  • It occurred due to an external event (such as a change in tax law); or
  • A redemption without replacement did not cause us to lower the long-term credit rating or revise the outlook to stable from positive; and
  • It did not lead us to question Energy Transfer's intent regarding the remaining hybrids, including its commitment to keep hybrids in the capital structure to absorb losses or conserve cash during periods of stress.
Is the Lake Charles LNG project the deciding factor for attaining a 'BBB' rating?

No. The proposed project will convert Energy Transfer's existing Lake Charles liquified natural gas (LNG) import and regasification terminal to an LNG export facility. The partnership has announced six sales and purchase agreements over the past six months, bringing the total amount of LNG contracted from its Lake Charles LNG export facility to nearly 8 metric tons per annum (mtpa). Although we expect the project to further strengthen Energy Transfer's overall business mix by increasing downstream connectivity, we view the partnership's existing business mix as supportive of a 'BBB' rating. However, the determining factor for an upgrade is the partnership's financial policy--which historically has been aggressive and a headwind against its credit quality--and its expected leverage profile. Although the partnership has not yet announced final investment decision (FID) on Lake Charles LNG, we would expect the project to come at a material cost, albeit at a cost advantage over other proposed LNG projects on the Gulf Coast. If the project reaches FID, we expect the partnership to finance it in a manner that would not harm its credit measures.

When would you consider upgrading Energy Transfer to 'BBB'?

We could consider raising the rating within the next 14 months if the partnership continues to exhibit prudent financial policy while generating excess free cash flow and maintaining S&P Global Ratings-adjusted debt leverage in the low-4x area. At year-end 2022, the partnership achieved S&P Global Ratings-adjusted leverage of approximately 4.25x and we forecast it will improve to approximately 4.0x this year. We could consider raising the rating earlier in the year if the partnership performs better than expected, maintains financial prudence by generating excess cash over the coming quarters, or keeps leverage at current levels.

How do you view the proposed Lotus Midstream Operations LLC acquisition?

We view the $1.45 billion acquisition to be supportive of credit quality as our pro forma financial measures are largely unchanged. The partial equity component is supportive of ET's positive rating outlook and consistent with its stated policy of financial discipline toward potential growth and acquisition opportunities. Its previous transactions (Enable Midstream and Woodford Express) were either leverage neutral or leverage accretive and not at the expense of its balance sheet. While we forecast the partnership to generate excess cash flow over the next 24 months, we would reasonably conclude it could target additional acquisition opportunities. That said, we believe the partnership has permanently shifted its strategy and no longer expect it to pursue leveraging transactions that would increase its S&P Global Ratings-adjusted leverage profile by over 0.5x from forecasted measures.

What credit ratios do we forecast over the next two years?

The partnership reduced its long-term debt by approximately $800 million in 2022 and we expect it to continue generating surplus free operating cash flow (FOCF) in 2023 and beyond. Now that the distribution is back to its pre-pandemic levels, we expect the partnership to generate sufficient discretionary cash flow to pursue additional bolt-on transactions, debt repayments, or shareholder friendly activities including unit repurchases or distribution increases. As a result, we project the partnership to achieve S&P Global Ratings-adjusted leverage of approximately 4.0x this year and in the 3.75x-4.00x range next year. Our financial measures do not consolidate either USA Compression Partners L.P. or Sunoco L.P.'s EBITDA or debt nor does it incorporate an FID for Lake Charles LNG. Instead, we calculate EBITDA on a cash basis, including the distributions received from these subsidiaries and other unconsolidated affiliates. In addition, we proportionally consolidate the EBITDA and debt of Dakota Access Pipeline (DAPL) based on ET's 36.4% ownership interest. Although different than how we treat its other joint ventures, we proportionally consolidate ET's interest in DAPL as we consider the pipeline to be a strategic asset and expect the partnership to support DAPL if it experiences financial stress.

Table 1

Energy Transfer L.P. Financial Metrics
LTM Forecast
12/31/2020 12/31/2021* 12/31/2022 12/31/2023 12/31/2024
Reported EBITDA (a) 10,531 13,046 13,093 13,580 14,180
SUN EBITDA (a) (739) (754) (919) (920) (920)
USAC EBITDA (a) (414) (398) (426) (495) (515)
Adjusted EBITDA - Unconsolidated Afilliates (b) (628) (523) (565) (565) (570)
Adjusted EBITDA - Non-wholly-owned subsidiaries (c) (2,253) (2,344) (2,486) (2,750) (2,850)
Total 6,497 9,027 8,697 8,850 9,325
Plus Distributions from:
SUN (d) 165 165 166 165 165
USAC (d) 97 97 97 97 97
Unconsolidated affiliates (b) 452 346 359 330 325
Non-wholly-owned subsidiaries (c) 1,084 1,066 1,119 1,240 1,290
Total 1,798 1,674 1,741 1,832 1,877
Unadjusted EBITDA (Cash Basis) 8,295 10,701 10,438 10,682 11,202
S&P Global Ratings Operating Lease Adjustment 118 105 88 90 90
S&P Global Ratings-adjusted EBITDA 8,413 10,806 10,526 10,772 11,292
Reported Debt (e) 51,438 49,702 48,262 39,860 38,860
SUN Debt (e) (3,669) (3,795) (4,120)
USAC Debt (e) (1,948) (1,992) (2,123)
63.6% of DAPL Debt (1,592) (1,590) (1,177)
Junior Subordinated Adjustment (f) (300) (300) (300) (300) (300)
S&P Operating Lease Adjustment (g) 910 876 856 856 860
S&P Asset Retirement Obligation Adjustment (h) 195 292 286 286 290
50% of Equity Hybrids (Preferreds A-H) (i) 2,382 3,026 3,026 3,026 3,026
S&P Global Ratings-adjusted Debt 47,416 46,219 44,710 43,728 42,736
Cash 367 336 257 150 150
Net Debt to EBITDA 5.60x 4.25x 4.23x 4.05x 3.77x
ET Consolidated (S&P Global Ratings-adjusted)
S&P Global Ratings-adjusted EBITDA 8,413 10,806 10,526 10,772 11,292
Less: Interest Expense (2,023) (1,974) (1,986) (2,460) (2,440)
Taxes (212) (153) (177) (50) (110)
Cash Flow from Operations 6,178 8,679 8,363 8,262 8,742
Maintenance capital spending (520) (581) (821) (800) (850)
Growth capital spending (3,239) (1,577) (2,205) (2,000) (2,200)
Total capital spending (3,759) (2,158) (3,026) (2,800) (3,050)
Free operating cash flow 2,419 6,521 5,337 5,462 5,692
Preferred distributions (378) (420) (471) (470) (470)
Common distributions (2,471) (1,779) (3,092) (3,850) (3,850)
Total distributions (2,849) (2,199) (3,563) (4,320) (4,320)
Discretionary cash flow for debt repayment (430) 4,322 1,774 1,142 1,372
Note: The Enable transaction closed on Dec. 2, 2021. As such these figures do not include a full years EBITDA contribution. (a) Company reported numbers, press releases. (b) Includes Citrus LLC, Fayetteville Express Pipeline, Midcontinent Express Pipeline, White Cliffs Pipeline, and other joint ventures. (c) Includes ET's ownership in the Bakken Pipeline, Bayou Bridge, Ohio River System, and Permian Express. (d) Taken from the supplemental information section of the press release, reconciliation of net income to S&P Global Ratings-adjusted EBITDA and distributable cash flow. (e) Company reports. (f) $600 million floating rate junior subordinated notes due Nov. 1, 2066 that receive 50% equity credit. (g) Footnotes in 10-K, reported numbers in 10-Q. (h) Tax-adjusted ARO, from 10-K. (i) 10-K, Energy Transfer Operating L.P., 50% of preferred equity. (j) Illustrative only; DAPL ratio implication does not flow through to cash flow statement.

Table 2

EBITDA Of Unconsolidated Affiliates
2022 2021 2020
Citrus 326 327 347
MEP 45 18 28
White Cliffs 20 19 44
Explorer 41 39 --
Other 133 120 209
Total 565 523 628
Note: All figures S&P Global Ratings-adjusted. Source: Company reports. S&P Global Ratings.

Table 3

Distributions Received From Unconsolidated Affiliates
2022 2021 2020
Citrus 133 235 191
MEP 27 12 26
White Cliffs 19 29 29
Explorer 27 26 --
Other 88 77 160
Total 294 379 406
Distributable Cash Flow from unconsolidated affiliates 359 346 452
Note: The difference between distributions received and distributable cash flow is generally related to funding requirements at affiliates and tax implications. Source: Company reports.

Table 4

Supplemental Information Section Of Press Releases
Reconciliation of Adjusted EBITDA with Distributable Cash Flow
2022 2021 2020
Adjusted EBITDA - Non-Wholly-Owned Subsidiaries (100%) 2,486 2,344 2,253
ET's Proportionate Share of Adjusted EBITDA 1,201 1,169 1,156
Distributable Cash Flow - Non-Wholly-Owned Subsidiaries (100%) 2,359 2,179 2,090
ET's Proportionate Share - Distributable Cash Flow 1,119 1,066 1,084
ET Percentage Ownership In Subsidiary:
Bakken Pipeline 36.4%
Bayou Bridge 60.0%
Maurepas 51.0%
Ohio River System 75.0%
Permian Express Partners 87.7%
Red Bluff Express 70.0%
Rover 32.6%
SemCAMS 51.0%
Others Various
Source: S&P Global Ratings. Company reports.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Mike Llanos, New York + 1 (212) 438 4849;
Secondary Contact:Michael V Grande, New York + 1 (212) 438 2242;

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