DBRS Confirms Enbridge Inc. Following Close of Merger with Spectra Energy

DBRS Limited (DBRS) has today confirmed the following ratings of Enbridge Inc. (ENB) and removed them from Under Review with Developing Implications where they were placed on September 6, 2016. The trends are Stable:

-- ENB, Issuer Rating of BBB (high)
-- ENB, Medium-Term Notes & Unsecured Debentures rated BBB (high)
-- ENB, Cumulative Redeemable Preferred Shares rated Pfd-3 (high)
-- ENB, Commercial Paper rated R-2 (high)

DBRS has also today confirmed the rating of ENB’s Fixed-to-Floating Subordinated Notes at BBB (low) with a Stable trend and removed them from Under Review with Developing Implications where they were placed on December 20, 2016.

These rating actions follow the announcement that the previously announced merger of ENB and Spectra Energy Corp (SEC) has closed as contemplated at the time of the initial merger announcement, reflects significant progress to date with respect to non-core asset sales and incorporates certain DBRS assumptions outlined in the September 8, 2016, DBRS press release.

BACKGROUND
On September 6, 2016, ENB announced that it had entered into a definitive merger agreement with SEC, a Houston, Texas-based energy company that indirectly owns and operates a large and diversified portfolio of predominantly natural gas-related assets in North America through its wholly owned subsidiary, Spectra Energy Capital, LLC (rated BBB).

ENB proposed to acquire all of the common shares of SEC in a stock-for-stock transaction (the Transaction) and assume consolidated SEC debt of approximately $22 billion (USD 14.8 billion). Upon closing, SEC would become an indirect wholly owned subsidiary of ENB (independent of other DBRS-rated subsidiaries) and cease to be a publicly held corporation.

DBRS subsequently determined that the closing of the Transaction, as announced, would not have an impact on the credit quality of ENB’s DBRS-rated subsidiaries and therefore confirmed these ratings on September 8, 2016. In addition, DBRS noted that it had expected to confirm all of ENB’s ratings with Stable trends in the event that the Transaction closed as contemplated. Please refer to DBRS’s press releases dated September 6, 2016, and September 8, 2016, for further details.

UPDATE
During Q4 2016, an ENB subsidiary closed the sale of its South Prairie Region Assets for $1.08 billion, and ENB entered into agreements to sell approximately $0.6 billion of additional miscellaneous non-core assets and investments. This represents substantial progress on ENB’s plan to divest of approximately $2 billion of non-core assets over the 12 months following the Transaction announcement in order to provide additional financial flexibility. DBRS notes that recent developments, including the reporting of Q4 2016 financial results by ENB and SEC, have not changed DBRS’s assessment of the credit impact of the Transaction.

IMPACT OF THE TRANSACTION ON ENB
DBRS believes that the Transaction provides increased diversification (on both geographic and product mix bases) as well as significantly increased size and scale to ENB’s business, partly offset by SEC’s modestly weaker stand-alone business risk profile. DBRS notes that the combined contractual and counterparty positions remain very strong, with approximately 96% of pro forma cash flow generated by cost-of-service, take-or-pay or fee-based contracts, and approximately 93% from strong investment-grade or equivalent counterparties. DBRS further notes that fee-based contracts typically entail volume risk, although they remain a relatively small proportion of pro forma cash flow.

With respect to financial risk profile, DBRS expects ENB to meet its key target metrics of 15% funds from operations (FFO) to debt and five times debt-to-EBITDA, likely in late 2018 or early 2019. DBRS notes the combined entity’s substantial medium-term capex program and consequently expects near-term pressure on ENB’s credit metrics to continue. DBRS expects the recovery in key credit metrics (on both consolidated and non-consolidated bases) at the combined entity to be faster than previously expected from ENB on a stand-alone basis. This expectation is consistent with a number of key DBRS assumptions, including the migration of the combined entity’s common dividend payout ratio toward the low end of the 50% to 60% range over the medium term, the achievement of expected run-rate synergies and estimated tax savings, and that there is no increase in structural subordination at the ENB level from currently contemplated levels.

The Stable trends incorporate DBRS’s expectation that any incremental investments in new projects will be consistent with maintaining a strong overall business risk profile and medium-term improvement in key credit metrics. Changes to any of these and other key assumptions would cause DBRS to revisit the current ratings and/or trends.

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 principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2017), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016), which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.