TEXT - S&P revises Enbridge Energy Partners LP outlook

Fri Nov 30, 2012 12:03pm EST

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Overview
     -- U.S. midstream energy partnership Enbridge Energy Partners L.P. (EEP)
 has announced expansion projects totaling about $4 billion over the next
two years, and we expect resulting financial measures may weaken beyond typical 
levels for the rating level through 2013.
     -- If EEP successfully completes its expansions and adopts a more 
conservative approach to growth spending, we believe the long-term business 
risk profile could improve through higher stable cash flows from its liquids 
segment.
     -- We are affirming EEP's 'BBB' corporate credit rating and revising the 
outlook to negative from stable.
     -- The negative outlook reflects the partnership's aggressive growth 
strategy, which carries execution risk and demonstrates management's appetite 
to periodically maintain higher leverage than peers for sustained periods to 
finance growth. It also reflects earnings volatility in EEP's natural gas 
segment.

Rating Action
On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' 
long-term and 'A-2' short-term corporate credit ratings on midstream energy 
partnership Enbridge Energy Partners L.P. (EEP). At the same time, we revised 
the outlook to negative from stable. 

Rationale
We characterize EEP's business risk profile as "strong", based on the 
competitive position of its crude oil pipeline system and the stable cash flow 
these assets provide. Partially offsetting these credit strengths are:
     -- Large funding requirements for growth projects,
     -- A financial risk profile we characterize as "aggressive" because of 
funding policies and financial measures that are weaker than similarly rated 
peers, 
     -- Commodity price volatility related to its natural gas gathering and 
processing segment,
     -- Ongoing costs related to oil spills,
     -- 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.

A strong business risk profile and aggressive financial risk profile maps to a 
'BB' credit rating in our business/financial risk matrix. However, EEP's 
corporate credit rating is higher due to our assumption of some level of 
support from parent Enbridge Inc. (ENB; A-/Stable/--). For example, ENB has 
provided financial support to EEP during periods of challenging capital 
markets access, as well as to fund growth through joint funding. ENB owns 22% 
of EEP's common and class B units and general partner interest.

The outlook revision reflects our opinion that EEP's growth plans, including 
announced expansion projects of about $4 billion through 2014 are likely to 
increase the partnership's financial leverage to about 5x debt to EBITDA 
through 2013 and reduce distribution coverage below 1x. While EEP has a good 
track record of development execution, the expansions are large and carry 
schedule and budget risks. If EEP successfully completes them, they can 
enhance its competitive position, take advantage of production trends in the 
Bakken and Canadian oil sands, and provide steady, relatively low-risk cash 
flows mainly through cost-of-service tolling arrangements or firm 
transportation contracts, increasing the relative share of EEP's liquids 
segment contribution to total EBITDA. Assuming incremental earnings and no 
delays or overruns, we believe financial leverage could improve to the low-4x 
area with distribution coverage rising above 1x in 2014. However, management 
has demonstrated tolerance to more aggressive leverage to finance growth. We 
therefore believe there is a risk ratios could remain elevated on a more 
prolonged or frequent basis.

The partnership has two large projects in conjunction with its parent, ENB 
under a joint funding agreement that gives EEP the option to scale back its 
investment to 25% from 40% of the joint activities. The Eastern Access 
pipeline project will consist mainly of replacing and expanding line 6B, which 
spilled crude oil in Marshall, Mich. in 2010, and we expect EEP's costs will 
be $600 million to $900 million. The broader project will bring additional 
crude to the Chicago/Flanagan-Sarnia corridor, and help feed lines 9A and 9B, 
which ENB is reversing to carry crude oil to eastern Canada. The Mainline 
Expansion will boost throughput on EEP's Alberta Clipper and Southern Access 
systems, and we assume EEP's share will also be at least $400 million. 
Although the joint funding agreement gets significant support from ENB, the 
projects will still need large funding requirements from EEP and result in 
additional financial leverage.

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 and we expect this share will rise to about 80% once EEP completes 
the expansion projects in 2016. In addition to the Eastern Access and Mainline 
expansions, EEP has a significant portion of its capital spending planned for 
the North Dakota system. The largest project would be the Sandpiper pipeline 
to transport 225,000 barrels per day (bpd) from Minot to Clearbrook and 
375,000 bpd onward to Superior. We expect a number of smaller projects will 
come on line in 2013, followed by Sandpiper in 2016.

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, declining over time as the liquids segment grows. EEP also has 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 the 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 $2.9 billion for the next 12 
months, including $2 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 adequate 
access to the capital markets to raise additional sources, or if needed, it 
could reduce or delay discretionary capital spending. Existing liquidity of 
about $3 billion consists of $234 million of cash on hand as of Sept. 30, 
2012, $1.9 billion of availability under its $2.7 billion of credit facilities 
that support a $1.5 billion commercial paper program, and our expectation of 
about $850 million in funds from operations (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.

Outlook
The negative outlook on the ratings reflects our view that EEP's credit 
measures and distribution coverage will remain weak in 2012 and 2013, largely 
as a result of growth spending. While we believe ratios may improve to the low 
4x area in 2014 after cash flow begins from its expansion projects, there is 
little financial cushion in the current rating. We could lower the ratings if 
there are cost overruns or delays in EEP's capital program, significant 
additional exposure to oil spills, or a continuation of aggressive growth that 
results in weaker financial measures that are 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 could stabilize the rating if construction risk recedes and we believe 
capital spending will moderate such that we expect sustained leverage measures 
of about 4x. A ratings upgrade is unlikely at this time, absent a marked 
change in EEP's financial risk profile.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Key Credit Factors: Criteria For Rating The Global Midstream Energy 
Industry, April 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Ratings List
Ratings Affirmed; Outlook Revised
                                        To                 From
Enbridge Energy Partners L.P.
 Corporate Credit Rating                BBB/Negative/--    BBB/Stable/--
 Senior Unsecured                       BBB                
 Junior Subordinated                    BB+                
 Commercial Paper                       A-2                
                                        To                 From
Enbridge Energy L.P.
 Corporate Credit Rating                BBB/Negative/--    BBB/Stable/--
 Senior Unsecured                       BBB
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