TEXT-S&P affirms Enbridge Energy Partners L.P.
Overview -- U.S. midstream energy partnership Enbridge Energy Partners L.P. (EEP) and parent Enbridge Inc. have announced expansion projects to its Lakehead pipeline system totaling about $2.6 billion. -- We are affirming EEP's 'BBB' corporate credit rating and maintaining the stable outlook. -- The stable outlook reflects the steady cash flows from EEP's liquids segment and the assets' strategic importance to North American crude oil supply, and our view that the partnership will fund the expansion in a balanced manner that will result in financial leverage in the low 4x area by 2013. Rating Action On May 22, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' corporate credit rating on midstream energy partnership Enbridge Energy Partners L.P. (EEP). The short-term rating of 'A-2' is unchanged and the outlook is stable. Rationale The ratings affirmation reflects our opinion that the announced expansion projects enhance EEP's competitive position, take advantage of production trends in the Bakken and Canadian oil sands, and will provide steady cash flows mainly through cost-of-service tolling arrangements or firm transportation contracts. Financial leverage in 2012 that is high for the rating and some execution risk with the expansion projects partly temper these strengths. Under our base case forecast, we expect debt to adjusted EBITDA of about 5x in 2012, as the partnership funds its large capital program. We assume that financial leverage improves to the low-4x area in 2013 and less than 4x in 2014 as incremental cash flows from the projects come on line. We also expect that the partnership will continue to pay down spill-related borrowing with insurance claim proceeds, that its liquids segment will continue to benefit from tariff increases, and that its Anadarko system will realize higher gathering and processing volumes. Higher throughput volumes along the North Dakota and Lakehead systems have helped improve financial measures from weak 2010 levels, with funds from operations (FFO) to total adjusted debt of 23% and adjusted debt to EBITDA of 4.1x as of March 31, 2012. The partnership announced the projects in conjunction with its parent, Enbridge Inc. (ENB; A-/Stable/--). The Eastern Access project will cost about $2.2 billion, consisting mainly of replacing and expanding line 6B, which spilled crude oil in Marshall, Mich. in 2010, and the addition of pump capacity to boost throughput on lines 5 and 62, all of which will bring additional crude to the Chicago/Flanagan-Sarnia corridor, and help feed lines 9A and 9B, which ENB is reversing to carry crude to eastern Canada. The Lakehead expansion will cost about $360 million and consist mainly of additional pump capacity to boost throughput on EEP's Alberta Clipper and Southern Access systems. However, the projects will require significant funding requirements and result in additional financial leverage. ENB will provide a 60% equity funding contribution for the Eastern Access projects, and we expect that EEP will fund its $880 million share of Eastern Access and full $360 million share of the Lakehead expansions in a balanced manner. We believe once the projects are completed cash flows will be relatively low risk and will get support from cost-of-service tariffs. We characterize EEP's business risk profile as "strong", based on the competitive position of its crude pipeline system and the stable cash flow these assets provide. Partially offsetting these credit strengths are: -- Commodity price volatility related to its natural gas gathering and processing segment, -- The costs related to the Marshall and Romeoville oil spills, -- A financial risk profile we characterize as "significant"' because of financial measures that are somewhat weak for the rating, and -- The master limited partnership (MLP) structure, which gives EEP incentive to pay out the vast majority of available cash flow to its unitholders each quarter. In addition, we expect the National Transportation Safety Board to release its report on EEP's 2010 oil spill later this year, which could lead to additional fines and penalties for the partnership. The liquids segment includes 6,500 miles of crude oil gathering and transportation lines and 32 million barrels of crude oil storage and terminal capacity. The segment includes the Lakehead, North Dakota, and Mid-Continent systems. The stable crude transportation business represented about 74% of 2011 EBITDA. In addition to the recently announced expansions, EEP has a significant portion of its capital spending planned for the North Dakota system. We expect the Bakken Expansion Program, which the partnership announced in August 2010, will add 145,000 barrels per day (bpd) of capacity, 25,000 bpd of which is already available; EEP expects the remaining 120,000 bpd to be in service by early 2013. EEP expects the Bakken expansion to cost about $370 million for the U.S. projects and about C$190 million for the Canadian projects. In addition, the $90 million Bakken Access Program, which the partnership announced in October 2011, involves increasing gathering pipeline capacity and building additional storage tanks at multiple locations in western North Dakota. The Bakken Access Program will be in service before the Bakken Expansion Program goes into service. In December 2011, EEP announced a further $145 million investment, which will expand capacity into the Berthold terminal by 80,000 bpd. The natural gas segment includes the East Texas, Anadarko, and North Texas systems. We expect this segment will contribute about one-quarter of 2012 EBITDA. In September 2011, EEP announced a joint venture with Enterprise Products Partners L.P. and Anadarko Petroleum Corp. to build a new natural gas liquids pipeline, the Texas Express Pipeline. EEP will own 35% of that pipeline and the partnership's portion of the estimated cost is $385 million. The pipeline will originate at Skellytown, Texas, and extend about 580 miles to Mont Belvieu, Texas. The pipeline's initial capacity will be about 280,000 bpd and customers have subscribed about 232,000 bpd of that capacity under long-term take-or-pay contracts. Liquidity The short-term credit rating on EEP is 'A-2'. We characterize its liquidity as "adequate". We assume uses of funds at about $3.2 billion for the next 12 months, including $2.3 billion of capital spending, about $750 million of distributions, and $100 million in debt maturities. Although we project current sources over uses of less than 1.2x, we believe EEP will have access to the capital markets to raise about $1.6 billion in sources to complement existing liquidity of about $2.6 billion, consisting of $277 million of cash on hand as of March 2012, $1.5 billion of availability under its $2 billion revolving credit facility that supports a $1.5 billion commercial paper program, and our expectation of about $850 million in FFO. If EEP has difficulty in accessing capital markets for funding, we believe it could significantly reduce or delay the capital program to maintain adequate liquidity. To the extent that EEP receives insurance proceeds, we expect the partnership will repay borrowings to further improve liquidity. We expect that EEP will continue to prudently balance the distribution requirements of its unitholders with the need for preserving internal liquidity. The partnership has maintained a 53.25 cent-per-unit distribution, with cash distribution coverage for the 12 months ended March 31, 2012 of about 1.1x and total coverage of about 1.01x, when including EEP's i-shares program (an equity paid-in-kind security that does not require cash payments, owned by Enbridge Energy Management LLC). Outlook The stable outlook on the ratings reflects our view that EEP will have adequate liquidity to fund its capital spending program and that, although its credit measures will deteriorate in 2012, we expect them to improve to the low 4x area in 2013 and below 4x in 2014 after cash flow begins from its expansion projects. The outlook also reflects our view of a modestly improved business position if EEP completes the expansions on time and within budget. However, there is little financial cushion in the current rating and we could lower the rating if there are cost overruns or delays in EEP's capital program, or there are significant fines and penalties or exposure to additional litigation for its 2010 oil spill that result in weaker financial measures that are at levels inconsistent with the 'BBB' rating. We could also lower the rating if weak commodity prices result in lower-than-expected volumes in the gathering and processing business, or if the partnership does not finance future funding needs in a balanced manner. Specific triggers that could lead us to consider a ratings downgrade are FFO to total debt below 15% and debt to EBITDA above 4.5x for a sustained period. We feel that a ratings upgrade is unlikely at this time, absent a marked change in EEP's financial risk profile. Related Criteria And Research -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 Ratings List Ratings Affirmed Enbridge Energy Partners L.P. Corporate Credit Rating BBB/Stable/A-2 Senior Unsecured BBB Junior Subordinated BB+ Commercial Paper A-2 Enbridge Energy L.P. Corporate Credit Rating BBB/Stable/-- Senior Unsecured BBB
- Tweet this
- Share this
- Digg this