Fitch Affirms Enterprise Products Operating at 'BBB '; Outlook Stable
The affirmation 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, an increasing percentage of fee-based revenues, and management's conservative approach towards distributions and financing. EPO has demonstrated strong access to both debt and equity markets throughout the business cycle, focused on continuing to raise cash flow and earnings to pay growing distributions, while maintaining strong distribution coverage and decreasing 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.
EPO is one of the largest providers of midstream services, and owns and operates significant must run midstream assets across the space. EPO owns and operates the largest storage and processing system at the Mont Belvieu energy hub, the largest LPG export terminal in the U.S. and other critical pieces of U.S. natural resource infrastructure. The affirmation considers that EPO is in the middle of a significant capital spending program as well as Fitch's expectations that leverage, coverage, and distribution metrics will weaken slightly relative to recent historical results but continue to exhibit strength relative to similarly rated midstream companies. Given EPO's large capital expenditure program, Fitch expects EPO's debt/EBITDA to be around 4.25x at the end of 2015, improving back to a 3.5x to 4.0x range in subsequent years as projects are completed and begin to generate cash flow.
KEY RATING DRIVERS
Beneficial Size & Scale: EPO's sizable portfolio of midstream assets provides strong consistent cash flow and earnings. The company's midstream asset base covers most major domestic gas producing basins. Geographic and business line diversity as well as EPO's large percentage of fixed fee type revenue have helped insulate it from some of the recent dynamic shifts in oil and gas production in the near term. EPO's size and scale also provide ample organic growth opportunities within its operating footprint, limiting the need to make large scale acquisitions for the sake of growth. EPO serves all U.S. based ethylene steam crackers, which are the largest consumers of natural gas liquids (NGLs).
Supportive ownership/Conservative distribution: EPO's management and sponsor, Enterprise Products Company, has demonstrated an ability and willingness to exert fairly conservative financial discipline and sound operational strategies on the partnership. While growth spending has been consistently high, EPD has funded a significant amount of its growth spending with equity and retained earnings. Additionally, moves to simplify EPD's capital and corporate structure and to cancel its General Partner's incentive distribution rights have helped lower EPD's cost of capital and removed the risk of the general partner taking aggressive steps to grow distributions. Distribution coverage has remained well above 1.25x even as EPD has steadily grown its distributions to unit holders demonstrating a willingness and ability to retain cash to support growth.
Moderate 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, increase to over 80%. 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 2014 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 2014. Fitch expects EPO's debt/EBITDA to be around 4.25x in 2015 improving back to a 3.5x to 4.0x range in subsequent years as projects are complete and begin to generate cash flow. Fitch expects EPO's distribution coverage to contract slightly over the next few years but remain above 1.2x.
Credit Concerns for EPO Include:
--Significant growth capital expenditures through 2017, which has the potential to weigh on metrics in the near term;
--Exposure, though limited, to commodity price volatility particularly NGL margins. Exposure to volume decreases. Much of EPO's revenue and gross margin is supported by fixed fee contracts with minimum take or pay commitments, but the issuer does have some volumetric exposure which will negatively impact earnings if production declines lead to lower usage on EPO's assets.
Fitch's key assumptions within the rating case for EPO include:
--\\$3 billion per year in annual growth spending through 2018, funded with a balance of debt and equity; Maintenance/sustaining capital spending consistent with recent historical trends.;
--WTI oil price that trends up from \\$50/barrel in 2015 to \\$60/barrel in 2016 and a long-term price of \\$70/barrel;
--Henry Hub gas that trends up from \\$3/mcf in 2015 to \\$3.25/mcf in 2016 and a long-term price of \\$3.75/mcf, which is consistent with Fitch's published Base Case commodity price deck.
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:
--Large-scale capital expenditure spending 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.
Liquidity Adequate: EPO's liquidity is more than able to support any of its current liquidity needs. EPO recently increased its capacity on its credit facilities by \\$500 million, leaving the partnership with up to \\$5.5 billion in aggregate borrowing capacity. EPO's facilities consist of an amended \\$4 billion multi-year revolving credit agreement that matures in September 2020 and a \\$1.5 billion 364-day revolving credit agreement which extends through September 2016.
EPO has actively retained distributable cash flow to support capital spending in lieu of equity offerings. Additionally, it has rationalized some of its non-essential assets including the \\$1.5 billion sale of its offshore business which closed in July 2015. EPO's near-term equity needs are limited and its debt maturities are manageable. The bulk of EPO's debt is not scheduled to mature until beyond 2018.
FULL LIST OF RATING ACTIONS
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'.
The Rating Outlook is Stable.