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

DBRS Limited (DBRS) confirmed Enbridge Energy Partners, L.P.’s (EEP or the Partnership) Issuer Rating and Senior Unsecured Notes rating at BBB, Junior Subordinated Notes at BB (high) and Commercial Paper at R-2 (middle), all with Stable trends.

EEP’s modified consolidated financial profile weakened in the last 12 months ending March 31, 2018, compared with 2016, as debt reduction was more than offset by reductions in EBIT, EBITDA and cash flow, primarily due to lower volumes and revenues on the Mid-Continent and North Dakota liquids pipeline systems. Earnings and cash flow growth are expected to be challenging in 2018 largely as a result of the negative impacts of U.S. tax reform and the Federal Energy Regulatory Commission’s (FERC) decision to no longer allow master limited partnership interstate natural gas and oil pipelines to recover an income tax allowance in cost-of-service rates. Subsequently, Enbridge Inc. (ENB; rated BBB (high) with a Stable trend by DBRS), which indirectly owns an effective 34.5% interest in, and manages the operations of, EEP, announced a proposal to acquire the remaining third-party public float of EEP and potentially mitigate the potential impacts of the FERC decision. However, the negative impact of U.S. tax reform would not be fully mitigated. DBRS expects EEP’s modified consolidated credit metrics to remain relatively weak (although stabilizing) for the current ratings due to the above-noted factors, as well as its large growth capital expenditures (capex) program and high distribution payout ratio. DBRS expects that growth capex will be funded with a significant component of equity from ENB, with cash distributions from completed projects supporting credit metric recovery in the medium term.

EEP’s business risk profile should benefit from the completion of its major low-risk (due to strong regulatory and contractual arrangements) liquids pipeline projects through 2019. DBRS notes, however, that, while necessary to support funding of several growth projects, the joint funding agreements with Enbridge Energy Company, Inc. (EECI; EEP’s general partner) have reduced EEP’s effective ownership of its flagship Lakehead System. This results in EEP’s business risk profile being more reliant on the performance of its other assets (including the North Dakota, Bakken and Mid-Continent pipeline systems) than is suggested by the relative consolidated EBITDA contributions (84% from Lakehead System in Q1 2018). DBRS considers the other assets to be satisfactory but not of the same quality as the Lakehead System.

DBRS expects ENB to provide a significant component of equity funding to support EEP’s funding needs. The Partnership’s 2018 external financing needs are manageable given forecast capex of $0.8 billion (of which $0.4 billion is to be received from EECI under its joint funding arrangements) and $0.5 billion of debt maturities compared with approximately $1.3 billion of availability under EEP’s credit facilities as at March 31, 2018. In 2019, EEP’s gross funding needs are likely to rise with peak spending on the U.S. Line 3 Replacement project, although it is only required to directly fund 1% of costs during construction. There are currently $500 million of consolidated EEP debt maturities in 2019. Cash distributions and the cash payout ratio continue to be pressured, despite the 40% distribution cut implemented in Q2 2017, due to the above-noted factors.

Finally, EEP benefits from the sponsorship of ENB, which, through EECI, has taken ongoing action to improve EEP’s liquidity and financing needs since 2013.

DBRS believes that a positive rating action is unlikely over the near term, and a negative rating action is possible if EEP’s credit metrics were to weaken beyond DBRS’s expectations during EEP’s growth phase and such a trend is unlikely to be reversed within a reasonable time frame.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.