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Energy Transfer Operating, L.P. -- Moody's rates Energy Transfer LP Baa3 with negative outlook; preferred units Ba2

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Rating Action: Moody's rates Energy Transfer LP Baa3 with negative outlook; preferred units Ba2Global Credit Research - 02 Apr 2021New York, April 02, 2021 -- Moody's Investors Service ("Moody's") assigned a Baa3 issuer rating to Energy Transfer LP (ET) and Ba2 ratings to all series of its Cumulative Redeemable Perpetual Preferred Units (the "preferred units"). Moody's also assigned a short-term P-3 rating to ET's commercial paper program. The outlook is negative.Effective April 1, Energy Transfer Operating, L.P.'s (ETO) currently outstanding preferred units will be terminated and simultaneously re-issued by ET. Its commercial paper program will be transitioned to ET from ETO as a result of the merger.These rating actions follow the April 1 closing of the merger of ETO into ET, the holder of ETO's general partner. ET has assumed ETO's unsecured notes as borrower by entering into various supplemental indentures, pursuant to which it has agreed to assume all the obligations of ETO, Sunoco Logistics Partners Operations L.P. (SXL) and ETC Sunoco Holdings LLC (fka Sunoco, Inc.) under their respective outstanding senior notes. There is no change to the Baa3 senior unsecured ratings currently in place at ETO, SXL or Sunoco Inc."The merger of ETO into ET is a further simplification of what has historically been a highly complex organizational structure," commented Andrew Brooks, Moody's Vice President. "Notwithstanding this simplification transaction, ET remains challenged by its highly leveraged capital structure."Assignments:..Issuer: Energy Transfer LP.... Issuer Rating, Assigned Baa3....Pref. Stock Preferred Stock, Assigned Ba2....Commercial Paper, Assigned P-3Outlook Actions:..Issuer: Energy Transfer LP....Outlook, Changed To Negative From Rating WithdrawnWithdrawals:..Issuer: Energy Transfer Operating, L.P.....Pref. Stock Preferred Stock, Withdrawn , previously rated Ba2....Commercial Paper, Withdrawn , previously rated P-3RATINGS RATIONALEET's ratings are supported by its very large consolidated and geographically diversified asset base comprised of crude oil, natural gas and natural gas liquids pipeline services and storage, and largely fee-based natural gas midstream gathering and processing operations. ET also holds the general partnership interest and common units in Sunoco LP (SUN, Ba3 positive) and USA Compression Partners, LP (USAC, B1 stable), further adding to overall operational diversity.ET, though its operating subsidiaries, 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 billion midstream asset base generates a largely fee-based cash flow stream, reporting EBITDA of $10.5 billion at year-end 2020, although down 5.5% from 2019. ET has seen its once robust EBITDA growth flatten in 2020 under the pressure of pandemic influenced upstream energy market weakness combined with fewer midstream growth opportunities. As a result, leverage on a proportionately consolidated basis increased to 5.6x in 2020. ET has guided 2021's reported EBITDA in a range of $10.6 to $11.0 billion. However, as a result of October's 50% distribution cut, which increased 2020's distribution coverage to 2.3x, supplemented by significant reductions in projected capital spending, Moody's expects ET to generate modestly positive free cash flow into 2022. This should enable ET to ultimately reduce leverage to under 5x on an assumption of generally flat EBITDA. Moody's recognizes, however, that in this uncertain energy operating environment even generating flat EBITDA entails execution risk. In February, ET announced the acquisition of Enable Midstream Partners, LP (ENBL, Baa3 negative) on a units-for-units basis, which Moody's views as having only a minimally positive effect on ET's financial leverage through ENBL's slightly less negative financial metrics being absorbed into the much larger ET. The total value of the transaction is about $7 billion, including debt assumption which will become pari with ET's debt. The closing of the acquisition remains pending.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. Uncertainty continues to plague the operation of ET's Dakota Access Pipeline (Midwest Connector Capital Company LLC, Baa2 negative) as it continues to confront litigation on several fronts. The MLP structure employed by ET vests considerable influence with the general partner of these entities, whose 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 ET to be in a good liquidity position into 2022, enhanced by strong earnings retention. Strong distribution coverage should enable ET to retain somewhat over $3 billion in cash which Moody's expects to be contributed to the repayment of debt. Moody's expects that ET's $1.4 billion of maturing notes in 2021 will be repaid in cash, with $3.05 billion of scheduled debt maturities in 2022. ET has projected 2021's growth capital spending of $1.45 billion, down over 50% from 2020's $3.05 billion, with further spending declines projected for 2022 and beyond. At year-end 2020, $3.1 billion was utilized under ET's $6.0 billion credit facilities, $1.66 billion of which was in commercial paper. Its $5.0 billion revolving credit facility has a December 1, 2023 scheduled maturity date, and is supplemented by a $1.0 billion 364-day credit facility, scheduled to mature in November. The 364-day facility had no borrowings outstanding. ET has a history of consistent support for its investment grade rating, which Moody's expects will continue to be the case.The outlook is negative. The outlook could be changed to stable should ET's leverage improve towards a sustainable 5x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSET's rating could be downgraded should debt/EBITDA remain above 5x. The rating could be upgraded if debt/EBITDA (proportionately consolidated) drops below 4.5x with strong distribution coverage remaining intact.Energy Transfer LP is headquartered in Dallas, Texas, and owns and operates a broad array of midstream energy assets.The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moPlease 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. 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