TEXT-S&P Assigns Enterprise Products Operating's Notes
Aug 6 - Overview -- Enterprise Products Operating LLC (EPO; BBB/Positive/--) is issuing up to $1.75 billion of senior unsecured notes. -- EPO's parent company, U.S. midstream energy company Enterprise Products Partners L.P. (EPD; BBB/Positive/--), unconditionally guarantees the notes. -- We are assigning our 'BBB' rating to the notes. -- Our positive outlook reflects the possibility that we may raise ratings by one notch if the trajectory of credit trends continues, specifically if the partnership continues to build scale, reduce its commodity price risk, and maintain debt to EBITDA in the 3.5x-4x range. Rating Action On Aug. 6, 2012, Standard & Poor's Ratings Services assigned its 'BBB' rating to Enterprise Products Operating LLC's (EPO) issuance of up to $1.75 billion of senior unsecured notes. EPO's parent company, U.S. midstream energy company Enterprise Products Partners L.P. (EPD), unconditionally guarantees the notes. The partnership will use the proceeds from the notes to repay $500 million of notes due August 2012 and for general partnership purposes. Rationale We base our ratings on EPD and its operating subsidiary EPO on the companies' "strong" business risk profiles and "significant" financial risk profiles under our criteria. Key credit strengths include EPD's operating scale, business-line diversity, and high proportion of fee-based revenues. Partially offsetting these strengths are EPD's aggressive growth strategy, commodity price exposure, significant financial leverage, and status as a master limited partnership (MLP). As an MLP, EPD distributes the majority of free cash flow (after maintenance capital spending) to unitholders each quarter and generally relies on the capital markets to fund growth capital spending. EPD is one of the largest midstream energy partnerships in the U.S. Its integrated network of assets consists of: -- Natural gas liquids (NGL) fractionation, transportation, and natural gas processing (slightly over 50% of its expected 2012 operating margin); -- Natural gas gathering, transportation, and storage (about 15%); -- Petrochemical services and refined products storage and transportation (nearly 20%); -- Offshore platform production services in the Gulf of Mexico (almost 10%); and -- Onshore crude oil pipelines and services (slightly under 5%). Over the past several years, EPD has simplified what had been a complex organizational structure. EPD merged with Duncan Energy Partners L.P. in September 2011 and with Enterprise GP Holdings L.P. in November 2010, which served to reduce its capital costs due to the elimination of incentive distribution rights. We expect EPCO (renamed Enterprise Products Co.; the entity that owns the noneconomic general partnership in EPD and about 41% of its limited partnership units) to pay down its moderate level of debt during the next few years with excess cash flows. Commodity price exposure remains the key business risk factor, most notably for NGL and crude oil marketing, petrochemical services, and keep-whole natural gas processing contracts. Although we believe that we have entered a period of relative strength of NGL prices vis-a-vis natural gas--which benefits Enterprise's cash flow--we recognize that prices are volatile, especially ethane and propane prices recently, and stress credit measures accordingly. (See the related criteria and research section.) Volume risk also exists, mainly for the natural gas gathering, refined products, offshore pipeline and production, and intrastate transportation businesses, but is not nearly as much of a driving force of cash flow volatility. Overall, cash flows are about 70% fee-based in nature, with hedges increasing near-term cash flow certainty to about 80%; we expect these ratios to be constant in 2012. EPD's new fee-based projects in the Haynesville and Eagle Ford gas basins are increasing the fee-based percentage of total cash flows to about 75%, which supports credit quality. EPD continues to perform at or above our expectations, both operationally and financially, with the receipt of cash flows from recently completed projects and encouraging NGL market conditions driving solid underlying financial performance. EPD's capital spending program is also well managed and focused primarily on low- to moderate-risk projects that are intensifying its strong competitive position. For 2012, we expect the partnership to be able to maintain a debt-to-EBITDA ratio of about 4x. Debt leverage, however, still somewhat depends on the level of commodity prices, volumes, and incremental debt related to new capital spending projects. We expect EPD to issue sufficient equity to maintain its history of funding its projects in a balanced manner. We also consider debt leverage on a consolidated basis, including debt at EPCO. We expect consolidated debt to EBITDA to be about 4.25x in 2012, although we expect EPCO's debt to be paid down during the next few years. Under our base-case forecast, we assume modest volume growth for NGL and natural gas processing and transportation and notable volume declines for offshore natural gas transportation and processing, with unhedged NGL volumes prices according to our price deck. We broadly expect stability in volumes to also come from economic conditions as Standard & Poor's base-case forecast for 2012 is for GDP growth of 2.1%, which indicates generally stable demand for energy products. For the 12 months ended March 31, 2012, EPD's adjusted financial measures improved, with debt to EBITDA of about 3.5x, funds from operations (FFO) to total debt of about 22%, and FFO interest coverage of 4.7x. Distribution coverage was strong at 1.4x as of June 30, 2012. Liquidity We view EPD's liquidity as adequate. For the upcoming 12 months, we expect liquidity sources to exceed uses by about 1.2x. As of June 30, 2012, cash sources consisted of projected FFO of slightly more than $3 billion and revolver availability and cash of nearly $3.1 billion. EPD has a $3.5 billion revolving credit facility due in September 2016, which was undrawn as of March 31, 2012. Expected cash uses over the next 12 months consist of capital spending (the vast majority relates to discretionary, growth-related projects) of about $2 billion, distributions of slightly more than $2 billion, and $1.2 billion of debt maturities. The partnership remains in compliance with its financial covenants (debt to EBITDA was about 3.1x as of March 31, 2012, relative to the maximum allowed limit of 5x). Cash sources could fall short of uses if EBITDA falls due to asset or commodity price underperformance, though the company's sizable percentage of fee-based and hedged cash flows limits this risk. If EBITDA were to fall, we would expect the company to curtail capital spending--especially as it gears its program toward discretionary growth-oriented projects--or use external financings, assuming the company does not reduce distributions. We estimate that the company will sustain capital spending at about $300 million. EPCO could also provide liquidity support by purchasing EPD equity, if necessary. Although EPD's liquidity and cash generation are adequate to fund its operations and maintenance capital spending, and to meet its debt service and distributions, continued access to the debt and equity markets is necessary for EPD to raise funds to support its growth-oriented capital spending. EPD has consistently demonstrated that it can access the capital markets even amid challenging market conditions. Outlook The positive outlook reflects the possibility that we may raise ratings by one notch if the trajectory of credit trends continues. We could raise the ratings if the partnership continues to build scale, reduce its commodity price risk, and maintains a stronger financial profile with debt to EBITDA in the 3.5x-4x range depending on the level of commodity prices and volumes. We could revise the outlook to stable if debt to EBITDA were to increase to more than 4x on a sustained basis, which could occur if the company manages funding its growth projects and acquisitions with a higher degree of debt. Related Criteria And Research -- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, July 24, 2012 -- Standard & Poor's Revises Its Natural Gas Liquids Price Assumptions For 2012, 2013, And 2014, June 11, 2012 -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List Enterprise Products Operating LLC Corporate credit rating BBB/Positive/-- New Rating Enterprise Products Operating LLC $1.75 Bil. Sr Unsec Notes Due 2015 And 2043 BBB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. 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