-- 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
-- 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
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.
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
-- Commodity price volatility related to its natural gas gathering and
-- 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.
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.
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 Affirmed; Outlook Revised
Enbridge Energy Partners L.P.
Corporate Credit Rating BBB/Negative/-- BBB/Stable/--
Senior Unsecured BBB
Junior Subordinated BB+
Commercial Paper A-2
Enbridge Energy L.P.
Corporate Credit Rating BBB/Negative/-- BBB/Stable/--
Senior Unsecured BBB