DBRS Comments on Enbridge Energy Partners, L.P.’s Preferred Unit Private Placement

DBRS notes today’s announcement that Enbridge Energy Partners, L.P. (EEP or the Partnership) will issue $1.2 billion of preferred units to Enbridge Energy Company, Inc. (EECI, EEP’s general partner and a wholly owned subsidiary of Enbridge Inc. (ENB)), in a transaction expected to close later today. Proceeds will be used by EEP to repay commercial paper (CP), to finance a portion of its large growth capex program and for general partnership purposes.

In addition, EEP expects to exercise its options to reduce its economic interests in both the Eastern Access and Mainline Expansion projects from 40% to 25% (raising ENB’s economic interests from 60% to 75%) by the June 30, 2013, deadline. EEP also retains the option to increase its participation in either project back to 40% for a period lasting until one year after the in-service date of each project (currently targeted for completion in 2016).

DBRS believes that the above-noted developments are supportive of the current ratings of EEP’s CP, Senior Unsecured Notes and Junior Subordinated Notes of R-2 (middle), BBB and BB (high), respectively, all with Stable trends, and demonstrate the strong sponsorship of ENB (21% effective ownership in EEP) with respect to EEP. Combined, the preferred unit issuance and option exercise are expected to reduce the amount of third-party financing required by EEP to fund its $8.5 billion organic growth plans by over $1.9 billion over the medium term.

These actions improve EEP’s liquidity position and credit metrics, which have weakened as a result of EEP’s large capex program and rising cash distributions to unit holders, combined with weaker than expected operating results and the cumulative impact of the costs related to 2010’s Line 6B pipeline crude oil spill. The $1.2 billion preferred unit issuance raises availability under EEP’s credit facilities to approximately $2.8 billion, from $1.6 billion, on a pro forma basis as at March 31, 2013.

The preferred unit issuance and option exercise also reduce pressure on EEP’s credit metrics over the near to medium term as the Partnership proceeds with its capital program, which DBRS expects will be funded with relatively equal components of debt and equity, such that EEP’s debt-to-capital ratio remains in the low-50% range. DBRS estimates that the impact of the preferred unit issuance is to substantially restore EEP’s DBRS-defined debt-to-capital, debt-to-EBITDA and cash flow-to-debt ratios (52%, 5.3 times and 14%, respectively, for the 12 months ending March 31, 2013) to more acceptable pro forma levels (in the high-40%, high-four times and mid-teens percentage ranges, respectively).

DBRS expects that EEP’s business risk profile will improve upon completion of the capex program. Future growth capex is heavily weighted toward the Liquids segment, rather than the Natural Gas segment, with the lower business risk profile of the former (due to strong regulatory and contractual arrangements) mitigating the higher business risk profile of the latter (due to volume and commodity price risks, although partly mitigated by contractual and hedging arrangements). DBRS expects Liquids to account for 75% to 80% of segment EBITDA in the medium term, compared with 72% in the 12-month period ending March 31, 2013.

The preferred units will have a fixed yield of 7.5%, reset every five years. Quarterly distributions will be deferred during the first eight quarters and added to the redemption value. Quarterly cash distributions will be payable beginning in the ninth quarter, with deferred distributions payable on the fifth anniversary or upon redemption of the units. The preferred units will be redeemable at EEP’s option on the five-year anniversary of the issuance and every fifth year thereafter, at par and including the deferred distribution. Earlier redemption is permitted under certain events, including the ability to redeem no less than 50% of the preferred units, using proceeds from EEP’s equity issuances or from the sale of assets, and no more than 50% from the issuance of debt. In the event that the preferred units have not been redeemed in full at the fifth anniversary of issuance, the deferred distribution will be payable at that time. In addition, the preferred units can be converted into approximately 43.2 million common units of EEP, at ENB’s sole option, on or after June 1, 2016.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on our website under Methodologies.