Fitch Ratings has assigned an 'A-' rating to Enterprise Products Operating LLC's (EPO) proposed issuance of senior unsecured notes.

EPO is the operating partnership for master limited partnership (MLP) Enterprise Products Partners L.P. (EPD). Proceeds from the offering are intended to be used for general corporate purposes. The Rating Outlook is Stable.

The ratings are supported by EPD's large size and diverse stream of stable profits. The company's assets fit well together in a value chain that has shown, year after year, an ability to capture value during volatile conditions. Concerns include the risk of a global recession and the potential for a mild amount of construction risk.

The Stable Outlook reflects Fitch's expectation that EPD will maintain run-rate leverage at approximately 3.0x.

Key Rating Drivers

Reliable Steady Volume Growth: Forecasts from a variety of sources portray long-term steady growth for the entire Exploration & Production industry in the Permian region, which is one of the important regions for EPD. Across its entire footprint, EPD has an unmatched integrated network among midstream companies. This network, among other things, helps EPD keep field area volumes high, on a 'demand pull' dynamic. Volumes are reliable. For instance, in the fee-based processing activity category, the 2Q21-to-3Q21 period was the last time EPD posted a negative percentage change.

Since midstream companies are generally required to spend capex 10-18 months in advance of new planned wells, many were hurt by the previous era of aggressive growth plans that featured many 'busts'. Steady growth is advantageous for midstream companies, and the year-to-date Sept. 30, 2023 volume performance by EPD shows the benefit, with rising EBITDA and moderated growth capex.

New Financial Policy: On Feb. 1, 2023, EPD announced a new leverage policy that targets a leverage range between 2.75x to 3.25x. (Fitch and EPD do not calculate leverage exactly the same, but the outcome is only slightly different most years.) EPD stated that its new policy was in line with the move by the broad energy sector leverage to be lower than the historical norm.

EPD also noted that its new policy conforms to the typical leverage of companies in corporate America that have a multi-decade record of increasing dividends. Indeed, EPD is the only U.S.-headquartered midstream company in Fitch's coverage that maintains this track record. When EPD announced the new policy, it was just closing its books on FY22, when Fitch-defined leverage was approximately 3.0x. This achievement is consistent with EPD's longstanding history of promptly delivering on its financial policies.

Low Business Risk: In 2017, EPD finished a large capex program that, while strategically successful, caused elevated leverage in prior years. Over the 2018-2022 period, the company kept its annual leverage within an approximately half-a-turn range. This fact is impressive given that minimum volume commitments from customers were mainly limited to large new-build assets. This leverage performance stamped EPD as unique among its U.S.-headquartered midstream peers.

Since 2018, the company has built up the strength of its credit quality. EPD has consistently beat the 2018-vintage and later Fitch EBITDA and leverage forecasts. EPD has also lowered the leverage target included in its financial policies more than once, including the aforementioned announcement in early 2023.

Derivation Summary

Like EPD, Enbridge Inc. (ENB; BBB+/Stable) is one of the largest North American midstream companies by all relevant measures. The two companies diverge as to the foundations of business stability. As noted, EPD has a highly integrated network built up of strategically considered assets, and operated with sound commercial acumen. ENB benefits from an asset base over 90% composed of rate-regulated assets or assets benefitting from long-term take-or-pay contracts. ENB has a good track record of managing regulatory risk as well as take-or-pay counterparty credit risk.

Enbridge during its period of acquiring three gas utilities will have somewhat elevated leverage. However, Fitch expects the company to post leverage comfortably below its negative leverage sensitivity level of 5.5x. Fitch expects EPD to post leverage in 2024 of approximately 3.0x.

EPD is rated one notch higher than ENB due to its much lower expected leverage, somewhat offset by Fitch's view that ENB has somewhat less business risk than EPD.

Key Assumptions

Fitch oil and natural gas price deck;

2023 and 2024 EBITDA rises steadily from the 2022 level, reflecting rising volumes on many assets, and the completion of new assets;

Increases in distributions and common unit repurchase activity, in aggregate, will exhibit positive growth for equity-holders; however, this aggregate flow will not show any significant step-change; and

Maintenance capex and growth capital investing for the forecast period relatively level to the expected 2023 grand total (Sea Port Oil Terminal is not in the forecast, as, among other milestones, the project needs to hit the Final Investment Decision milestone to be included in the forecast).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade is not anticipated; however, EBITDA leverage sustained below 2.5x in conjunction with maintaining or lowering business risk could lead to a positive rating action.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage above 3.2x on a sustained basis;

An acquisition that significantly raises the overall business risk for the partnership and/or meaningfully increases leverage even after 24 months from closing.

Liquidity and Debt Structure

Strong Liquidity: As of Sept. 30, 2023, EPO had consolidated liquidity of approximately $3.8 billion, comprised of available borrowing capacity under its revolving credit facilities and unrestricted cash on hand.

EPO does not have any significant levels of maturities coming due over the next few years. Fitch expects the company to continue to generate positive FCF.

Issuer Profile

EPD is among the leading companies facilitating global hydrocarbon commerce.

Summary of Financial Adjustments

Fitch calculates midstream energy companies' EBITDA by using cash distributions from unconsolidated affiliates, rather than by using equity in earnings. Additionally, Fitch removes from EPD's EBITDA the net income attributable to non-controlling interests. Fitch treats EPO's junior subordinated notes as having 50% equity content, per its criteria for 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis.'

Date of Relevant Committee

22 September 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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