TEXT-S&P rates Enterprise Products Operating 'A-2' short-term ratings
Aug 9 - Overview -- Enterprise Products Operating LLC (EPO) is establishing a $2 billion commercial paper program. -- EPO's parent company, U.S. midstream energy partnership Enterprise Products Partners L.P. (EPD; BBB/Positive/--), unconditionally guarantees the notes to be issued under the commercial paper program. -- We are assigning our 'A-2' short-term corporate credit rating to EPO and EPD and our 'A-2' short-term rating to the program. -- According to Standard & Poor's rating criteria, EPO and EPD's corporate credit rating of 'BBB' maps to a commercial paper rating of 'A-2'. -- The positive outlook on both entities reflects the possibility that we may raise ratings by one notch if the trajectory of credit trends continues. Rating Action On Aug. 9, 2012, Standard & Poor's Ratings Services assigned its 'A-2' short-term corporate credit rating to Enterprise Products Operating LLC (EPO) and Enterprise Products Partners L.P. (EPD). The long-term corporate credit rating on both entities is 'BBB' and the outlook is positive. We also assigned our 'A-2' short-term rating to the $2 billion commercial paper (CP) program. Rationale According to Standard & Poor's rating criteria, our 'BBB' corporate credit ratings on EPO and EPD maps to a CP rating of 'A-2'. The partnership will use the program for working capital requirements and other partnership purposes. EPO's $3.5 billion revolving credit facility that expires in September 2016 will fully backstop the program. As of June 30, 2012, EPD's reported balance sheet debt totaled about $15 billion. Standard & Poor's Ratings Services bases its ratings on Enterprise Products Partners L.P. (EPD) and its operating subsidiary Enterprise Products Operating LLC 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. Offsetting these strengths in part 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 mainly includes: -- Natural gas liquids (NGL) fractionation, transportation, and natural gas processing (slightly more than 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 less than 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. 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 enhance its strong competitive position. 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. For 2012, we expect the partnership to be able to maintain debt to EBITDA 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. For the 12 months ended March 31, 2012, EPD's adjusted financial measures improved, with debt to EBITDA about 3.5x, funds from operations (FFO) to total debt about 22%, and FFO interest coverage at 4.7x. Distribution coverage was strong at 1.4x as of June 30, 2012. 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 to pay down its debt during the next few years. 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 a 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 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 Enterprise Products Partners L.P. Corporate Credit Rating BBB/Positive/-- New Rating Enterprise Products Operating LLC Enterprise Products Partners L.P. Short-Term Corporate Credit Rating A-2 Enterprise Products Operating LLC Commercial Paper A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.