DBRS Confirms Enbridge Pipelines Inc.’s Long-Term Debt at A (high) and Changes Trends to Stable; Commercial Paper Confirmed at R-1 (low) with Stable Trend

DBRS has today confirmed the Commercial Paper rating of Enbridge Pipelines Inc. (EPI or the Company) at R-1 (low) with a Stable trend. Concurrently, DBRS has confirmed the Company’s Medium-Term Notes & Unsecured Debentures rating at A (high), with the trend changed to Stable from Negative.

The confirmation reflects continued progress on EPI’s large multi-year capex program, diminished risks with respect to potential cost overruns and funding requirements and its low-risk business profile due to the strong regulatory environment and long-term contractual arrangements.

The trend change reflects DBRS’s belief that EPI has passed the point of maximum risk with respect to deterioration of its credit metrics as a result of its multi-year capex program, and is on track to substantially improve its key credit metrics from current levels during 2010. In addition, DBRS expects the Company to further improve its key credit metrics in 2011 and maintain these levels going forward in order to remain at the current long-term debt rating.

While EPI’s credit ratios are being pressured as a result of the Company’s large capex program (expected to approximate $1.7 billion in 2009 to 2010, including $0.6 billion remaining to be spent on Alberta Clipper Canada as at September 30, 2009), DBRS believes that EPI is on track to substantially restore its key Mainline credit metrics during the second half of 2010 (H2 2010) (including its cash flow-to-debt ratio to the low-20% range and EBIT interest coverage ratio to the mid-three times range compared with the 10% to 15% range and the low-to-mid-three times range expected in 2009). Placement of large capacity expansion projects into service, including the Line 4 Extension on April 1, 2009, and the Canadian portion of the Alberta Clipper Pipeline project (Alberta Clipper Canada) in mid-2010, provide earnings and cash flow to restore the Company’s credit metrics. Note that DBRS’s analysis of EPI is focused on the Mainline financial statements, which exclude inter-company transactions and investments from the consolidated financial statements. The Mainline operations support all of EPI’s direct external debt.

The Company’s exposure to rising funding requirements as a result of a large capex portfolio and potential cost overruns is significantly diminished relative to one year ago. While the Company’s project economics are largely protected from cost overruns, EPI is exposed to the potential requirement to raise additional funding should cost overruns occur. DBRS notes that the Company has not announced any cost overruns with respect to its major projects over the past two years. Capex is expected to total approximately $1.6 billion in 2009, primarily for construction on the Line 4 Extension (placed in service on April 1, 2009) and Alberta Clipper Canada (expected to be in service in mid-2010) and for maintenance capital. The resulting cash flow deficits will be financed with a combination of external debt and equity. EPI has maintained adequate liquidity, with approximately $675 million available under unused credit facilities on a direct basis at September 30, 2009. On November 6, 2009, EPI issued $500 million of medium-term notes, the proceeds of which were used to reduce short-term debt, thereby improving its liquidity position and debt maturity profile. The Company’s maturities (including $250 million in Q4 2012) are manageable. DBRS believes that recent improvements in capital markets conditions should allow the Company to continue to raise debt at economical interest rates.

From a business risk perspective, EPI benefits from strong demand for western Canada sedimentary basin (WCSB) crude oil in the U.S. Midwest (PADD II), supported by increasing crude oil production, rising pipeline throughput and the cost-of-service tolling methodology. Each of these factors contributes to earnings and cash flow stability. Further, EPI and Enbridge Inc. are exploring additional projects (e.g., Woodland and Fort Hills – currently on hold) to further increase access to U.S. markets for WCSB crude oil beyond 2010. The recently completed Line 4 Extension as well as the Alberta Clipper Canada project will be regulated under long-term cost-of-service tolling methodologies, protecting EPI against volume risk, most capital cost overruns, property taxes and power costs.

The Company’s Incentive Tolling Settlement (ITS), which applies to the “older system,” has reduced regulatory uncertainty and protects EPI from volume risk. DBRS notes that expiry of the ITS in December 2009 exposes the Company to potential risks with respect to the final negotiated terms of the ITS expansion. Approval of unfavourable terms could have a potentially negative impact on the Company’s credit metrics, although favourable terms have been negotiated in the past; a trend that DBRS expects to continue.

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

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on the DBRS website under Methodologies.

This is a Corporate rating.