DBRS Comments on Enbridge Energy Partners, L.P.’s Gas Business IPO Plans

DBRS notes today’s announcement that Enbridge Energy Partners, L.P. (EEP or the Partnership) intends to file a registration statement on Form S-1 with respect to the initial public offering (IPO) of Midcoast Energy Partners, L.P. (MEP), a proposed master limited partnership whose initial asset would consist of an approximate 40% ownership interest in EEP’s existing natural gas and natural gas liquids midstream business (Gas Business). EEP would retain ownership of the general partner (GP) and all the incentive distribution rights of MEP.

GAS BUSINESS IPO SUPPORTIVE OF EEP’S RATINGS
DBRS believes that the Gas Business IPO, combined with the developments announced on May 8, 2013 (see below), are supportive of the current ratings of EEP’s Commercial Paper (CP), Senior Unsecured Notes and Junior Subordinated Notes of R-2 (middle), BBB and BB (high), respectively, all with Stable trends. Combined, these actions would improve EEP’s liquidity position and credit metrics, which were weakened as a result of EEP’s large capex program and rising cash distributions to unitholders, combined with weaker-than-expected operating results and the cumulative impact of the costs related to 2010’s Line 6B pipeline crude oil spill.

DBRS expects that EEP’s business risk profile will improve upon completion of the Gas Business IPO and subsequent offerings of interests in MEP and 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). On a pre-Gas Business IPO basis, DBRS expected 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. Post-IPO, EEP’s direct segment EBITDA would be even more heavily weighted toward the Liquids segment.

GAS BUSINESS IPO DETAILS
EEP expects that MEP would sell a minority of its total limited partner interests in the offering and raise gross equity proceeds of approximately $400 million to $500 million, which it would apply together with MEP borrowings, for its initial interest in the Gas Business. EEP expects the initial Form S-1 filing to occur during Q2 2013. Proceeds from completion of the IPO would be used by EEP to repay CP, finance a portion of its large growth capex program and for general partnership purposes.

EEP expects the IPO and subsequent offerings of MEP interests to provide an additional source of capital for EEP’s liquids pipeline growth projects through the intended drop down of EEP’s remaining Gas Business ownership interests to MEP over the next four to five years, reducing EEP’s direct equity and debt capital requirements related to its large growth capex program. This would also provide EEP with the financial flexibility to accept future drop downs of liquids pipeline assets from Enbridge Inc. (ENB, rated A (low) with a Stable trend), 100% owner of EEP’s GP, Enbridge Energy Company, Inc. (EECI).

MAY 8, 2013, DEVELOPMENTS
In a May 8, 2013, press release, DBRS noted that EEP would issue $1.2 billion of preferred units to EECI in a transaction that would close later that day. Proceeds were to be used by EEP to repay CP, to finance a portion of its large growth capex program and for general partnership purposes. EEP also indicated that it expected to exercise its options to reduce its economic interests in both the Eastern Access and Mainline Expansion projects to 25% from 40% (raising ENB’s economic interests to 75% from 60%) 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).

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.