Fitch Upgrades Enterprise Products Operating LLC to 'BBB+'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Enterprise Products Operating LLC's (EPO) Issuer Default Rating (IDR) and senior unsecured debt rating to 'BBB+' from 'BBB'. Additionally, Fitch has upgraded EPO's junior subordinate notes to 'BBB-' from 'BB+' and affirmed its 'F2' short-term IDR and commercial paper rating. Roughly $17 billion in debt is affected by today's action. A full list of ratings can be found at the end of this release. The Rating Outlook is Stable.
The upgrade reflects the quality and diversity of the company's sizable portfolio of midstream assets, the strong resulting cash flow and earnings from EPO's growth project spending, the company's conservative management approach towards distributions and financings and its increasing percentage of fee-based revenue. EPO has demonstrated strong access to both debt and equity markets throughout the business cycle focused on continuing to grow cash flow and earnings and pay its distribution, while maintaining strong distribution coverage and decreasing its exposure to commodity price volatility. Its size and scale provide it ample organic growth opportunities and its integrated midstream energy systems serves as a crucial link between oil and gas producers and consumers throughout the U.S.
Fitch recognizes that EPO is in the middle of a significant capital spending program. Fitch expects that leverage, coverage, and distribution metrics will continue to exhibit strength relative to similarly rated midstream companies, despite EPO's large capital expenditure program. Fitch expects EPO's debt/EBITDA to be around 3.5 times (x) in 2014.
KEY RATINGS DRIVERS
Beneficial Size & Scale: EPO's sizable portfolio of midstream assets provides strong consistent cash flow and earnings. EPO's midstream asset base covers most major domestic gas producing basins. Geographic and business line diversity largely insulate EPO from any dynamic shifts in oil and gas production as well as provides ample organic growth opportunities within its operating footprint, limiting the need to make large scale acquisitions for the sake of growth. EPO accesses all of the major gas and oil production regions in the U.S. EPO serves all U.S. based ethylene steam crackers, which are the largest consumers of natural gas liquids (NGLs). Fitch notes that NGL and crude prices can be very volatile and weakness in crude, NGL, and or fractionation spreads could impact EPO's cash flow and earnings.
Significant Capital Spending: Fitch recognizes that EPO is in the middle of a significant capital spending program. These growth investments are largely focused on fee-based or revenue assured assets which should continue to help lower EPO's exposure to changes in commodity prices. Additionally, Fitch expects EPO's leverage metrics will improve as EPO benefits from the earnings and cash flow associated with project completion and operation.
Decreased Business Risk: EPO's large capital spending program has primarily been focused on lower risk projects with solid returns and long-term contracts with revenue assurance characteristics. As a result, the company has seen the percentage of its fee-based gross margin, not subject to commodity price volatility, move to over 80% (2013). This shift in fixed fee type revenue has and will result in less earnings and cash flow volatility even as natural gas, NGL and oil prices have fluctuated.
Strong Metrics: EPO's year-end 2013 financial metrics were strong for the ratings category with debt/ EBITDA of 3.5x with a 50% equity treatment for EPO's junior subordinated notes. Distribution coverage remained strong relative to its master limited partnership peers at roughly 1.5x for 2013. Fitch expects distribution coverage for 2014 - 2015 to remain well above 1.2x. Fitch expects leverage to remain near 3.5x in 2014.
Beneficial Industry Trends: Longer term the growing production and utilization of oil, natural gas, and NGLs has prompted the movement of energy production activity to liquids rich producing basins and underpinned a strong need for midstream infrastructure. This shift has been and should continue to be highly beneficial to EPO given its scale and geographic scope and the need for midstream solutions.
Adequate Liquidity: Liquidity remains adequate with cash and availability under its revolver of roughly $4.1 billion at 2013 year end. Near term maturities are manageable with $650 million of maturing notes remaining for 2014 and $1.3 billion in notes maturing in 2015.
Credit Concerns for EPO Include:
--Significant growth capital expenditures through 2015, which have the potential to weigh on metrics in the near term;
--Exposure, though limited, to commodity price volatility particularly NGL margins.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Maintaining debt/adjusted EBITDA at 3.0x or below on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Continued large-scale capital expenditure program funded by higher than expected debt borrowings, leading to debt/EBITDA of approximately 4.0x or above on a sustained basis.
--An increase in gross margin sensitivity to changes in commodity prices.
Fitch upgrades the following ratings:
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured rating to 'BBB+' from 'BBB';
--Junior subordinated rating to 'BBB-' from 'BB+'.
Fitch affirms the following ratings:
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013;
--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013;
--'Rating Pipelines, Midstream, and MLPs -- Sector Credit Factors', Jan. 13, 2014;
--'2014 Outlook: Natural Gas Pipelines', Dec. 10, 2013;
--'2014 Outlook: Midstream Services', Dec. 10, 2013;
--'NGL Pipelines: Northeast Surplus Drives New Projects', Dec. 20, 2013;
--'Pipelines, Midstream, and MLP Stats Quarterly - Third Quarter 2013', Dec. 17, 2013;
--'Credit Considerations for the GP/LP Relationship', Nov. 6, 2013;
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors', Aug. 5, 2013;
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs', April 18, 2013;
--'The Top Ten Differences Between MLP and Corporate Issuers', Feb. 19, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Rating Pipelines, Midstream and MLPs - Sector Credit Factors
2014 Outlook: Natural Gas Pipelines
2014 Outlook: Midstream Services
NGL Pipelines: Northeast Surplus Drives New Projects
Pipelines, Midstream, and MLP Stats Quarterly - Third-Quarter 2013
Credit Considerations for the GP/LP Relationship
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
The Top Ten Differences Between MLP and Corporate Issuers