What: Shares of Enbridge Energy Partners (NYSE: EEP) took a 10% nosedive in June after Moody's downgraded the credit rating for both Enbridge corporate entities that own assets: energy delivery specialist Enbridge (NYSE: ENB), and Enbridge Energy Partners.
So what: On June 23, Moody's downgraded parent company Enbridge's credit to Baa2 and Enbridge Energy Partners' to Baa3. Both of these ratings are considered investment-grade, but just barely. Moody's stated that Enbridge's dividend policy change significantly increases cash payments to shareholders while embarking on a very ambitious growth program at the same time.
Another reason offered is the plan to transfer assets to two separate entities: Enbridge Energy Partners and Enbridge Income Fund. This income fund is a Canadian entity that operates similarly to a limited partnership here in the U.S.: It will own several cash-generating assets that will pay distributions to public fund holders and parent company Enbridge. So any project the parent company embarks upon needs to be dropped down into one of the two separate entities. This added complexity in the eyes of the ratings companies puts Enbridge at slightly greater risk.
The ratings agencies might have a point. Today, the Enbridge family of companies has a net debt-to-EBITDA ratio of 5.9 times, which puts it on the high end of the major pipeline companies. Enbridge Energy Partners' leverage is considerably lower than the parent company's, but that is of little consequence since its future is so tightly tied to the successes and failures of its parent.
Now what: With a slightly overloaded balance sheet and plans for $44 billion in organic growth projects over the next several years, it seems a bit odd that the company would now significantly increase its dividend payout and reduce the chances of generating excess cash that could be deployed to pay for these programs. Considering that other companies in the space also have robust growth platforms but much stronger financial standing, it might be best to take Moody's advice on this one and shy away from buying shares of Enbridge.
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