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.
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.
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
-- Offshore platform production services in the Gulf of Mexico (almost
-- 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
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.
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.
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
Enterprise Products Operating LLC
Corporate credit rating BBB/Positive/--
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. 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