DBRS Confirms Enbridge Energy Partners, L.P. at BBB and R-2 (middle)

DBRS has today confirmed the ratings on the Commercial Paper, Senior Unsecured Notes and Junior Subordinated Notes of Enbridge Energy Partners, L.P. (EEP or the Partnership) at R-2 (middle), BBB and BB (high), respectively, all with Stable trends. The rating action reflects the following factors:

(1) EEP has made significant progress on its large multi-year capex program (expected to approximate $0.9 billion in 2010, including $356 million spent during the six months ending June 30, 2010 (6M 2010), down from an average of $1.3 billion per year in 2008-2009 and $2.0 billion in 2007). The recent completion of major liquids pipeline projects, including the $1.2 billion ($0.4 billion net to EEP) U.S. portion of the Alberta Clipper pipeline (Alberta Clipper U.S., in service on April 1, 2010) and the $150 million North Dakota Phase VI pipeline expansion (in service on January 1, 2010) has improved the Partnership’s business risk profile due to the heavy weighting of capex towards low-risk (due to strong regulatory and contractual arrangements) liquids pipelines projects. DBRS estimates that the Liquids, Natural Gas and Marketing segments accounted for 72%, 27% and 1%, respectively, of EEP’s segment EBITDA in the 12 months ending (LTM) June 30, 2010.

(2) DBRS expects that the mid-September 2010 acquisition of Elk City Gathering and Processing System (Elk City) for approximately $686 million, in combination with the Partnership’s growth capex program, will be funded with relatively equal components of debt and equity over time. DBRS also expects that the commodity price risk associated with the Elk City assets will be hedged in a manner that is consistent with the Partnership’s current hedging strategy within its Natural Gas segment.

The transaction modestly increased EEP’s exposure to its Natural Gas segment, which has a higher business risk profile than its Liquids segment due to volume and commodity price risks, although this is partly offset by contractual and hedging arrangements. The Elk City assets, which were operating at approximately 60% of capacity during 6M 2010, are located near EEP’s current Anadarko System, providing significant opportunity for operational synergies.

(3) DBRS expects that EEP will manage the expected timing lag between incurrence of cash outlays related to its Q3 2010 Line 6A and Line 6B pipeline crude oil spills (combined estimate of $340 million to $460 million, excluding fines and penalties) prior to insurance recoveries (expected to reduce EEP’s net exposures to $45 million to $60 million, excluding fines and penalties) while maintaining reasonable credit metrics. DBRS estimates that the net exposures are equivalent to approximately 5% to 6% of the Partnership’s EBITDA in the LTM June 30, 2010. While increased pipeline integrity costs are likely going forward, a significant portion of these costs will likely be included in pipeline tolls. DBRS expects EEP’s cash flow-to-debt, EBITDA interest-coverage and EBIT interest-coverage metrics (17.9%, 3.67 times and 2.61 times, respectively, for the LTM June 30, 2010) to weaken in the near term, and to return to recent levels during H2 2011.

(4) The strong sponsorship of Enbridge Inc. (ENB), which, through its wholly owned subsidiary, Enbridge Energy Company, Inc. (EECI, EEP’s general partner (GP)), acquired approximately $500 million of Class A units of EEP in December 2008, and concluded a joint funding agreement under which ENB effectively funded two-thirds of the $1.2 billion cost of the Alberta Clipper U.S. crude oil pipeline project, with the remaining one-third to be funded by EEP (previously 100% EEP) in July 2009.

EEP has enhanced its liquidity position this year with the issuance of $500 million of 5.2% senior unsecured notes (due in 2020) in March 2010 and $400 million of 5.5% senior unsecured notes (due in 2040) in September 2010, as well as the August 2010 addition of a new $350 million term credit facility maturing in April 2013. Including the new facility, EEP had nearly $1.1 billion of availability under its credit facilities on a pro forma basis at June 30, 2010.

The Partnership’s external financing needs through year-end 2011 are manageable. In addition, despite the near-term pressures noted above, EEP’s funding requirements have diminished considerably from peak 2007-2008 levels. Therefore, DBRS expects the Partnership’s liquidity position to remain sufficient to support its needs in the event that capital markets were to return to the difficult conditions experienced during most of 2008 and the first half of 2009.

Earnings and cash flow growth are expected over the medium term, mainly from the following sources:

(a) The $686 million Elk City acquisition completed in mid-September 2010 is expected to be accretive to earnings, and provide operational synergies, upon integration with EEP’s Anadarko system.
(b) The $370 million U.S. portion of the Bakken Expansion Program is expected to provide 145,000 b/d of pipeline capacity from receipt points within North Dakota to interconnections with existing affiliated Enbridge pipelines by Q1 2013.
(c) The $142 million Haynesville Shale Project is expected to improve the takeaway capacity options for Haynesville Shale producers in Q2 2011 and position the Partnership for continued growth in this area.

Incremental EBITDA from these projects is expected to contribute to improved credit metrics over the medium term. EEP continues to pursue organic growth projects in both its Liquids and Natural Gas segments.

DBRS expects liquids pipelines to account for two-thirds to three-quarters of segment EBITDA in 2011. EEP’s exposure to commodity prices is partly mitigated by its hedging strategy. As at June 30, 2010, EEP had hedges in place within its Natural Gas segment for most of its estimated commodity positions in 2010, and 60% in 2011.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.