DBRS Confirms Enbridge Pipelines Inc. at “A,” and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the “A” Issuer Rating, the “A” Medium-Term Notes & Unsecured Debentures rating and the R-1 (low) Commercial Paper rating of Enbridge Pipelines Inc. (EPI or the Company). All trends are Stable. The confirmation reflects the Company’s modestly stronger credit metrics in 2015 at its Canadian Mainline (Mainline) operations, which form the basis for DBRS’s EPI ratings. The Stable trends incorporate EPI’s strong liquidity supported by $3.0 billion of committed credit facilities ($1.1 billion was available at March 31, 2016) and DBRS’s expectation that the Mainline metrics will be under pressure through 2018 because of substantial capital expenditures for the Canadian portion of the Line 3 Replacement (L3R) Program but are expected to start improving in 2019 as the capex level falls off and the L3R is expected to be completed.

The business risk profile of EPI remained consistent with the current ratings following (1) the August 10, 2015, transfer of EPI’s ownership interest in Enbridge Energy Company, Inc. (EECI, wholly owned by EPI) to its then direct parent Enbridge Inc. (ENB). EECI directly held the U.S. assets of EPI, which included certain liquids pipeline assets, Enbridge Energy Partners, L.P. (EEP) and certain of EPI’s renewable energy projects (the Restructuring); and (2) The September 1, 2015, sale of EPI’s shares by IPL System Inc. (an ENB subsidiary) to Enbridge Income Partners, LP (another ENB subsidiary). Currently, most of EPI’s earnings and cash flow are from the Mainline.

The Mainline operates under the ten-year Competitive Tolling Settlement (CTS) effective on July 1, 2011. The CTS provides a joint tariff for volumes originating in Western Canada that are transported on the U.S. Lakehead Pipe Line System (Lakehead System). Under the International Joint Tariff agreement, any shortfall in toll revenues under the CTS for the Lakehead System could potentially reduce the toll revenues available to the Mainline. However, DBRS views that this volume risk to the Mainline is manageable. In 2015, the Mainline benefited from higher throughput, reflecting stronger oil sands production combined with solid refinery demand in the U.S. Midwest market, resulting in stronger earnings and hence stronger EBIT-interest and cash flow metrics than 2014.

Construction risk was reduced meaningfully by the end of 2015 as a number of growth projects were placed in service. Over the medium term, the L3R remains EPI’s largest capital project. The target in-service date for the L3R is expected to be delayed until early 2019 instead of late 2017 as previously expected. The most recent estimated capital cost for the L3R is approximately $4.9 billion. However, with the delay, the cost of this project is expected to increase.

As a result of this large capex, DBRS expects that the Mainline credit metrics will be under pressure until the L3R is completed. DBRS notes that EPI has targeted debt leverage of 55% debt and 45% equity for Mainline. As of December 31, 2015, debt leverage was approximately 53%. DBRS also notes that in April 2016, EPI’s now indirect parent Enbridge Income Fund Holdings Inc. issued approximately $575 million through a public offering and approximately $143 million through a private placement to ENB. A substantial portion of the funds from the equity offering was injected into EPI for the financing of the L3R and, as such, improved its liquidity.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016), and DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments – Non-Financial Companies (April 2016), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.