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Enbridge partnership shuffles capital structure as it weighs strategic options

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Enbridge partnership shuffles capital structure as it weighs strategic options

As it continues its strategic review, Enbridge Energy Partners LP has launched three actions to help fund ongoing projects and improve cash flow, among them the recently announced deal to take Midcoast Energy Partners LP private.

"The objectives are to improve EEP's financial position and strengthening its future outlook," Mark Maki, principal executive officer of general partner Enbridge Energy Co. Inc., or EECI, said on a Jan. 27 conference call. "Together, these actions reduce short-term capital expenditure requirements and enhance EEP's cash flow."

One action involves Enbridge Energy Partners entering a joint funding agreement with the Enbridge Inc. subsidiary EECI for the U.S. portion of its Line 3 replacement program, under which EECI will shoulder 99% of the project funding and Enbridge Energy Partners the remaining 1%. EEP may choose to increase its stake to as much as 40% within four years after the project begins service. EECI would pay $450 million for the 99% stake, which includes Enbridge Energy Partners' share of construction costs to date.

"Through this arrangement, EEP maintains a significant opportunity to invest in a strategic growth project, while obtaining relief from cash-flow-dilutive funding requirements during the construction period," Maki said.

Second, the partnership would use the proceeds from the joint funding agreement to acquire an additional 15% interest in the Eastern Access project for about $360 million, exercising its option under the joint funding agreement for the project. Eastern Access is is "highly complementary" to Enbridge Energy Partners' core liquids pipeline business and draws stable cash flows, Maki said.

The third action was EECI's merger agreement to acquire all of Midcoast's outstanding common units, which represent a roughly 25% effective interest in Enbridge Energy Partners' gas gathering and processing business. "This action enables EEP to retain more of its cash flow, reduces its costs associated with being in additional public company, and simplifies its corporate structure," Maki said.

Investor reaction was sharply negative, with units of Enbridge Energy Partners down 18% at $21.32 in late afternoon trading.

The strategic review is expected to continue into the second quarter. The partnership is also considering moves related to the sustainability of its current level of distributions, further cost efficiency measures, extensions of supportive actions by Enbridge and restructuring of general partner incentive distribution rights.

Regarding a possible change in distribution levels, Maki said it "was established at a time when a significant portion of the distribution was supported by cash flow from the natural gas business." He continued, "Despite significant progress on the cost structure, our natural gas gathering and processing business has been impacted by a continued cyclical downturn."

Enbridge Energy Partners may also execute a sale of part or all of its remaining interest in its natural gas gathering and processing assets, either to a third party or its sponsor Enbridge. The partnership would also coordinate with Enbridge to finalize its joint funding arrangement for the Bakken pipeline system.