DBRS Confirms Enbridge Inc. at BBB (high), Pfd-3 (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Enbridge Inc. (ENB or the Company) at BBB (high) and the ratings on the Company’s Medium-Term Notes & Unsecured Debentures, Cumulative Redeemable Preferred Shares and Commercial Paper at BBB (high), Pfd-3 (high) and R-2 (high), respectively, all with Stable trends.

The confirmations incorporate DBRS’s assessment of ENB’s strong business risk profile, which should benefit over the medium term from completion of its current large portfolio of low-risk capital projects, combined with an aggressive financial risk profile that continues to pressure its credit metrics and has resulted in increased structural subordination at the ENB level over time. The Stable trends incorporate DBRS’s expectation that any incremental investments in new projects would be consistent with maintaining a strong overall business risk profile and medium-term improvement in key credit metrics with the completion of the current large capital expenditure (capex) program.

On a consolidated basis, ENB estimates that its low-risk, mostly regulated and/or contracted operations, comprised of a diversified portfolio of investments, provide approximately 95% of its cash flow and that 95% of its credit exposure (excluding Enbridge Gas Distribution Inc.) is from customers that are either investment grade or provide security. On a non-consolidated basis, ENB receives cash dividends from a variety of sources, supporting its ability to meet its direct debt obligations. DBRS estimates that, based on the first six months of 2016 (6M 2016) results, ENB’s DBRS-adjusted EBIT (before extras) is approximately 20% unencumbered (i.e., EBIT from entities with no external debt providing a stream of unencumbered dividends to the Company), 56% once-encumbered and 24% twice-encumbered. In the past year, ENB has moved away from its previous hybrid holding company (holdco)/operating company structure and closer to a pure holdco structure, the continuation of which has negative credit risk profile impacts for holders of ENB’s direct external debt and preferred shares.

Significant common equity issuance by ENB (in Q1 2016) and Enbridge Income Fund Holdings Inc. (in Q2 2016), combined with the benefit of increased earnings and cash flow from $9 billion of projects placed into service since the start of 2015, provided support to ENB’s key credit metrics (except for interest and fixed-charges coverage ratios) in 6M 2016. DBRS continues to expect the current capex and funding plans to have a negative impact on the Company’s credit metrics during the early years of the current plan, prior to improvement in the later years (as the longer-dated projects are placed in service and begin to generate cash flow), although the current projects are more heavily back-end weighted than in previous years.

While a positive rating action is unlikely in the medium term, a negative rating action could result if the degree of structural subordination at ENB increases beyond currently contemplated levels.

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: Rating Holding Companies and Their Subsidiaries (January 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.