Fitch Initiates 'BB' On Energy Transfer Equity's $1.95B Secured Facilities.

NEW YORK -- Fitch Ratings has initiated rating coverage on Energy Transfer Equity, L.P. (ETE) by assigning the following new ratings:

--Issuer Default Rating (IDR) 'BB-';

--Proposed $1.3 billion senior secured series B term loan maturing Nov. 1, 2012 'BB';

--$150 million outstanding senior secured term loan maturing Feb. 8, 2012 'BB';

--$500 million outstanding senior secured revolving credit facility maturing Feb. 8, 2011 'BB'.

ETE's Rating Outlook is Stable.

In assigning a rating to the senior secured credit facilities, Fitch considered the financial and operating characteristics of Energy Transfer Partners, L.P. (ETP; rated 'BBB-' with a Positive Rating Outlook by Fitch), the standalone credit profile of ETE, and the expected recovery for senior secured creditors of ETE under distressed conditions. The series B term loan, along with new ETE equity, is being used to fund the purchase of $1.2 billion of ETP limited partner (LP) units. ETP will use the proceeds to finance the first step of its acquisition of Transwestern Pipeline Co. (TWP). In a concurrent transaction, ETE will purchase the remaining 50% of ETP incentive distribution rights it doesn't own from an affiliate company, Energy Transfer Investments, L.P. (ETI), through the exchange of $2.4 billion new ETE LP units and the assumption of $70 million of ETI indebtedness.

The senior secured credit facilities are governed by ETE's existing Amended and Restated Credit Agreement dated July 14, 2006 to be further amended by a First Amendment dated Nov. 1, 2006. The First Amendment increases the exiting term loan facility to $1.45 billion from $150 million to allow for the placement of the series B term loan. The senior secured debt has a first priority interest in all tangible and intangible assets of ETE including approximately 62 million ETP LP units and ETP's 2% general partner (GP) interest, including 100% of the incentive distribution rights of ETP.

Fitch has prepared proforma and projected cash flow analysis for ETE. Fitch considers first year debt to EBITDA and EBITDA to interest for ETE of approximately 4.0 times (x) and 3.5x, respectively, as reasonable for master limited partnership (MLP) holding company structures and believes the debt at ETE does not present an inordinate amount of risk for ETE or ETP given the amount and predictability of its cash flow stream. With the TWP purchase and several large organic growth projects becoming operational in the coming months, ETP's upstream distributions should increase and as a result, ETE's cash flow ratios will strengthen. However, Fitch recognizes that ETE's outstanding debt at Nov. 1, 2006, of $1.616 billion is substantial and that ETE's ability to refinance the debt in the future could be impaired by deteriorating capital market conditions.

In assigning the ratings, Fitch also considered recovery prospects for senior secured lenders in a distressed situation. Based on the value to loan definition in the ETE credit agreement, at current market prices the senior secured lenders would have recovery valuations of approximately of approximately 385%. Moreover, under reasonable stress case scenarios Fitch found that 100% recoveries for creditors were likely. A favorable consideration is ETP's conservative distribution practices and high level of retained cash, which provide a substantial financial cushion.

Fitch most recently affirmed ETP's unsecured debt and IDR at 'BBB-' on Sept. 15, 2006 following the company's announcement that it had entered into agreements to purchase TWP from GE Energy Financial Services and Southern Union Gas Company in a series of transactions valued at $1.465 billion. On Oct. 19, 2006, Fitch assigned a 'BBB-' rating to ETP's new $800 million of senior notes. ETP, an MLP, is engaged in the natural gas pipeline, storage, and midstream business through its operating subsidiaries.

ETP's Positive Rating Outlook reflects the improving operating performance of its integrated Texas natural gas assets, the increasing scale, scope, and diversity of its operations, strong quantitative credit measures, a conservative distribution policy, a favorable near-term regional natural gas supply situation from expanding Barnett Shale and Bossier Sands development, and the expected benefits of ongoing pipeline expansions. In addition, on Oct. 3, 2006, ETP announced it had entered into an agreement with CenterPoint Energy Resources Corp to convert its legacy merchant gas supply contracts for service into Houston to more predictable, long-term fixed-fee transportation and storage contracts. As a result, effective March 1, 2007, ETP's obligation to finance seasonal natural gas storage inventory will be eliminated. Given its current funding plans for the TWP purchase, Fitch also expects ETP's consolidated credit measures to remain consistent with its long-term targets throughout the TWP purchase and integration.

In addition to the execution risk associated with the TWP transaction, of moderate concern is the ongoing event and integration risks inherent in its active growth strategy and the structurally subordinated position of the ETP notes to approximately $306 million of secured notes and bank debt at subsidiary Heritage Operating, L.P. and an undetermined amount of debt anticipated for TWP. In its analysis of ETP, Fitch also considers the long-term exposure to changes in commodity price and supply conditions across all operations and the structural relationships between affiliated companies, including ETE.

ETP's distribution coverage and credit ratios are among the strongest for its peer group of investment grade pipeline MLPs. For fiscal year ended Aug. 31, 2006, Fitch expects total debt, including temporary inventory borrowings, to EBITDA and EBITDA to interest to approximate 3.5x and 6.5x, respectively. Debt to EBITDA could drop below 3.0x as seasonal natural gas and propane borrowings are repaid and the financial benefits of the TWP and May 2006 Titan propane acquisitions and ongoing pipeline expansions are recognized. Fitch expects ETP's distribution coverage ratio (distributable cash flow to partnership distributions) for fiscal 2006 to approximate 1.4x, resulting in retained cash in excess of $150 million.

ETP's largest ongoing expansion project involves the construction of a series of wide-diameter pipeline extensions from the Fort Worth Basin and other regional producing basins running east and southeast to the Carthage, Texas hub and interconnections with several interstate systems. Total estimated cost for the project is approximately $1.3 billion with the final phase targeted for completion in November 2007. ETP has recently announced the completion of phase one of the project and it remains on schedule. Approximately $420 million had been incurred on the project through May 31, 2006. Reports indicate that ETP has contracted with several shippers representing 1.7 billion cubic feet per day of capacity. At this level of shipper participation, the expansion should provide ETP a profitable return on its investment even if throughput levels are below expectations.

Fitch believes that the long-term credit ratios targeted by ETP in its financial policy are generally consistent with a 'BBB' rating given the company's blended business risk and scale of operations. They include: debt to EBITDA of 3.25x or less, interest coverage of greater than 5.0x, and a distribution coverage of 1.2x. Specific factors that Fitch would consider that could lead to a rating upgrade to 'BBB' include: the successful completion of its ongoing pipeline expansion projects; the completion of the purchase and permanent funding of TWP; and a continuation of ETP's conservative financial policy and strong operating results. However, such an upgrade at ETP would not necessarily result in an upgrade of ETE's rating.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.