Which MLPs Have an Investment Grade Rating?
Over the past 10 days, there have been two big acquisition announcements in the master limited partnership space. In both cases, the CEO of the acquiring partnership stressed that the primary motivation for the acquisition was the hope that the new assets would trigger a credit rating upgrade from ratings agencies like Standard & Poor's.
These ratings are a big deal because they have a direct impact on an MLP's cost of capital. With that in mind, today we're looking at which MLPs already have an investment grade rating and what other MLPs need to do to join their ranks.
First and foremost, Standard & Poor's does not rate every single master limited partnership. Of the 100 or so MLPs that exist today, approximately 56 carry ratings from S&P. Of that group, only 16 are rated investment grade. Remember, S&P defines investment grade as anything rated BBB- or higher.
Here are the 16 MLPs that make the grade:
Enterprise Products Partners
Magellan Midstream Partners
Boardwalk Pipeline Partners
Enbridge Energy Partners
Kinder Morgan Energy Partners
Plains All American Pipeline
Spectra Energy Partners
DCP Midstream Partners
El Paso Pipeline Partners
Energy Transfer Partners
Sunoco Logistics Partners
Western Gas Partners
Though the S&P rating system goes as high as AAA, no master limited partnership has attained that rating. The business structure of an MLP is inherently more risky than a corporation, which will most likely prevent any from ever attaining the highest rating. In fact, Enterprise Products Partners became the first MLP to reach the BBB+ level just this past February. Magellan Midstream Partners followed shortly thereafter, receiving the same rating in July.
As the above chart suggests, there are a handful of MLPs in line hoping to be the next to qualify for the BBB+ rating. Some will have a much better chance than others, however, despite having the same BBB today. For example, S&P slapped Enbridge Energy Partners with a negative outlook last November, and reaffirmed that negativity this past May. You can get a sense of the agency's logic with this excerpt from its press release:
The negative outlook reflects rating pressure from the partnership's elevated financial measures and tight covenant cushion as it pursues major capital expansions with delayed cash flows, and ongoing expenses associated with its oil spill cleanup.
Enbridge Energy Partners is a bit of a mess right now, and Kinder Morgan Energy Partners or Boardwalk Pipeline Partners are likely better candidates for an upgrade. But why? What exactly drives these ratings?
Standard & Poor's methodology for rating midstream companies is a long and winding road (which you can read about in its entirety here), but there are a few boxes that every MLP must check if it's looking to attain an investment grade rating:
Debt: 4.5 times debt to EBITDA is the limit; ideally, it's 4.0 times or lower.
Distribution coverage ratio: Keep it above 1.0 times coverage.
Revenue: As stable as possible, fee-based revenues are a big winner here, exposure to commodity prices is not.
Business Mix: Diversity is king, and that goes for geographical footprint as well as asset make-up. One-trick ponies need not apply.
When you look at this list, you can begin to gauge why an Enbridge Energy Partners may have a negative outlook and why Energy Transfer Partners might see an upgrade coming its way sometime next year. The partnership is much more diverse, both from an operational and geographical standpoint, than it was three years ago. On top of that, it finally (finally!) has its act together financially and is increasing its distribution. Investors can track the above metrics and have a sense of when the ratings tide might turn for Energy Transfer.
It's fair to be skeptical of ratings agencies, given their role in the financial crisis, and by no means should investors confuse a solid rating for a signal to buy. That said, the key factors to a great rating also signify a great business. Additionally, these ratings really do matter because they affect an MLP's cost of capital, and therefore they shouldn't be dismissed entirely.
No safer dividend
Dividend stocks can make you rich. They don't garner the notoriety of high-flying growth stocks, but they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.
The article Which MLPs Have an Investment Grade Rating? originally appeared on Fool.com.
Fool contributor Aimee Duffy has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.