Fitch Ratings has assigned a 'BB' rating to In a release on
RGP is currently in the process of acquiring
Fitch expects RGP's leverage to be high for 2014 (above 5.0x) as it completes these mergers, but improve back to between 4.5x to 5.0x in 2015, further improving as earnings and cash flow from acquisitions and growth projects start to be fully realized on an annual basis. Offsetting increased leverage is Fitch's belief that the acquisitions will not negatively impact credit quality or RGP's business risk. Fitch notes that the mergers will provide significant strategic benefits for RGP, including increased size, scale and business line diversity, favorable growth opportunities, and entry into the prolific Marcellus/Utica shales. The assets being acquired are complementary to RGP's existing businesses from a geographic perspective and should provide significant organic growth opportunities and easily achievable cost saving synergies
Key Ratings Drivers
Increased Size/Scale: The transactions significantly increase RGP's size and scale (a key factor for master limited partnerships), help diversify its cash flows and improve its capital markets access, and offer competitive advantages in the form of operational and cost synergies. Additionally, the transactions provide a significant foothold in the growing Marcellus region, as well as complementary Midcontinent,
Significant Gross Margin Stability: Pro forma for the acquisitions, RGP will have over 72 percent of its gross margin supported by fee-based contracts which are insulated from changes in commodity prices. PVR and Hoover are largely fee-based and while EROC's gross margin is only roughly 40 percent fixed fee, RGP is committed to maintaining its current hedging practices. Roughly 28 percent of RGP's gross margin is exposed to commodity price changes, particularly changes in natural gas and natural gas liquids prices (NGLs). RGP hedges the majority of its current-year open exposure, but is expected to have roughly 10 percent of gross margin fully exposed to commodity sensitivity. Should current hedging practices change materially to increase exposed gross margin, Fitch would likely take negative ratings action.
Increased Leverage: Based on Fitch calculations, RGP's Debt/ Adjusted EBITDA is expected to be above 5.0x for 2014, but return to the 4.5x-5.0x range in 2015 and fall below 4.5x for 2016 and beyond. Acquisitions are being done with a significant equity component, but the PVR transaction in particular is slightly leveraging due to high leverage at PVR. Fitch expects distribution coverage between 1.0x to 1.25x in 2014 and 2015. Fitch prefers to see distribution coverage in excess of 1.0x, as the cash retention can provide a financial cushion in a downturn, and help fund growth spending and or debt reduction. Fitch typically adjusts EBITDA to exclude nonrecurring extraordinary items, and noncash mark-to-market earnings. Adjusted EBITDA excludes equity in earnings and includes dividends from unconsolidated affiliates. Fitch does not adjust EBITDA for material projects currently under construction.
General Partner Relationship: While Fitch's ratings largely reflect RGP's credit profile on a stand-alone basis, they also consider the company's relationship with
JV/Structural Subordination: RGP is the owner of several joint venture (JV) interests; some of which have external debt. RGP is structurally subordinate to the cash operating and debt service needs of these JVs and reliant on JV distributions to fund its capital spending and its own distributions.
Adequate Liquidity: RGP currently has roughly
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Continued large-scale acquisitions, or capital expenditures funded by higher than expected debt borrowings;
--A failure to significantly hedge open commodity price exposure;
--Significant and prolonged decline in demand/prices for NGLs, crude and natural gas;
--Debt/Adjusted EBITDA above the 4.5x to 5.0x range and distribution coverage below 1.0x on a sustained basis would likely lead to a one-notch downgrade.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Reduced business risk resulting from a higher percentage of fixed-fee operations;
--Material improvement in credit metrics with sustained leverage at 4.0x or below.
Fitch currently rates Regency as follows:
--Long-term Issuer Default Rating at 'BB';
--Senior secured revolver at 'BB+';
--Senior unsecured notes at 'BB';
--Series A preferred units at 'B+'.
Additional information is available at 'fitchratings.com'.
--'Corporate Rating Methodology',
--'Parent and Subsidiary Rating Linkage',
--'2014 Outlook: Natural Gas Pipelines ',
--'2014 Outlook: Midstream Services',
--'NGL Pipelines: Northeast Surplus Drives New Projects',
--'Credit Considerations for the GP/LP Relationship',
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Credit Considerations for the GP/LP Relationship
NGL Pipelines: Northeast Surplus Drives New Projects
2014 Outlook: Midstream Services
2014 Outlook: Natural Gas Pipelines
Parent and Subsidiary Rating Linkage
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Fitch Ratings has assigned a 'BB' rating to
In a release on