Fitch Affirms Enterprise Products Operating LLC at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Enterprise Products Operating LLC's (EPO) Issuer Default Rating (IDR) and senior unsecured debt rating at 'BBB+'. Fitch also affirms EPO's junior subordinate notes at 'BBB-' and Short-term IDR and commercial paper rating at 'F2'. The affirmations follow the announcement that Enterprise Products Partners, LP (EPD) has acquired the general partner, related incentive distribution rights, as well as, common and subordinated units of Oil Tanking Partners, L.P. (OILT).

Additionally, EPD has offered to acquire the remaining limited partner interests in OILT from outstanding common unit holders. Roughly $19 billion in debt is affected by today's action. A full list of ratings follows at the end of this release.

The Rating Outlook is Stable. EPO is the operating subsidiary of EPD.

EPD announced this morning it has acquired the general partner and related incentive distribution rights, 15,899,802 common units and 38,899,802 subordinated units in Oiltanking Partners L.P. (OILT) held by Oiltanking Holding Americas, Inc. (Oiltanking Holding). EPD paid total consideration of approximately $4.41 billion to Oiltanking Holding comprised of $2.21 billion in cash and 54,807,352 EPD common units. EPD also paid $228 million to assume notes receivable issued by OILT.

EPD's subordinated units in OILT are expected to convert to common units in mid-November 2014, with EPD expected to own roughly 66% of OILT's outstanding common units following conversion. In a second step to today's transaction, EPD announced an offer to acquire OILT's remaining common units, offering OILT holders 1.23 EPD common units in exchange for each OILT common unit. EPD intends to merge OILT with EPO. This part of the transaction is valued at $1.4 billion and still needs to be negotiated with the Conflicts Committee of the general partner of OILT, and voted on by OILT unit holders. The total value of both transactions is roughly $6.0 billion.

Fitch believes the transaction to be generally positive for EPO. OILT owns marine terminals on the Houston Ship Channel and Port of Beaumont which are complementary to EPD's existing operations providing strategic benefits as well as opportunities for growth and asset repurposing. EPD is already OILT's largest customer which should help limit any integration risks as well as help make projected synergies and cost savings more easily achievable. EPD is forecasting roughly $30 million in synergies from the transaction. Fitch does not expect EPO's credit metrics to be significantly impacted by the transaction with expectations of leverage in the 3.5x to 4.0x range for 2014-2016 and coverage consistent with recent historical results.

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.

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. Pro forma for the acquisition Fitch expects leverage to remain between 3.5x to 4.0x in 2014 through 2016 and distribution coverage for 2014 - 2015 to remain above 1.2x.

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 with an increased focus on export capabilities. This shift has been and should continue to be highly beneficial to EPO given its existing scale and geographic scope and the assets provided in the OILT acquisition.

RATINGS SENSITIVITIES

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 or acquisitions 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 affirms the following ratings:

Enterprise Products Operating LLC

--Long-term IDR at 'BBB+';

--Senior unsecured rating at 'BBB+';

--Junior subordinated rating at 'BBB-';

--Short-term IDR and Commercial Paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Liquidity Review: Pipelines, Midstream and MLPs' (July 2014);

--'Pipelines, Midstream and MLP Stats Quarterly - First Quarter 2014' (June 2014);

--'U.S. Midstream Dashboard' (June 2014);

--'Non-Traditional MLP Assets (Changing Mix, Changing Risk)' (May 2014);

--'MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)' (March 2014);

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);

--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).

Applicable Criteria and Related Research:

Liquidity Review: Pipelines, Midstream and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752807

Pipelines, Midstream and MLP Stats Quarterly -- First-Quarter 2014 (First-Quarter Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750842

U.S. Midstream Dashboard

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751223

Non-Traditional MLP Assets (Changing Mix, Changing Risk)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370

MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738615

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Pipelines, Midstream and MLPs — Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=888474

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Contacts

Fitch Ratings
Primary Analyst
Peter Molica, +1-212-908-0288
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ralph Pellecchia, +1-212-908-0586
Senior Director
or
Committee Chairperson
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Peter Molica, +1-212-908-0288
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ralph Pellecchia, +1-212-908-0586
Senior Director
or
Committee Chairperson
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com