DBRS Confirms Enbridge Inc. at “A”, Pfd-2 (low) and R-1 (low)

DBRS has today confirmed the Medium-Term Notes & Unsecured Debentures, Cumulative Redeemable Preferred Shares and Commercial Paper ratings of Enbridge Pipelines Inc. (Enbridge or the Company) at “A”, Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The confirmations reflect: (1) improvement in the Company’s credit metrics since the 2008 low point; (2) lower growth capex and net funding requirements over the 2010-2014 period than in the five-year plans presented in prior years; and (3) an improved business risk profile following completion of two major liquids pipelines projects earlier this year. However, maintenance of satisfactory credit metrics will remain a challenge in a high growth period as discussed below.

(1) The improvement in Enbridge’s credit metrics since 2008 reflects increased earnings and cash flow and lower capex and investments resulting in smaller free cash flow deficits and financing requirements over the subsequent 18-month period. Enbridge’s credit metrics in the six months ending June 30, 2010 (6M 2010), while weaker than in 6M 2009, reflect only limited benefits to date from the first of two major liquids pipelines projects that came onstream earlier this year (the Alberta Clipper Project (Alberta Clipper) on April 1, 2010 and Southern Lights Diluent Import Pipeline (Southern Lights) on July 1, 2010) and all of the associated debt and interest expense. Therefore, DBRS expects improvement in the second half of 2010.

(2) Enbridge has a commercially secured base capex plan of $8.8 billion for 2010 to 2014. Approximately $0.9 billion was spent during 6M 2010.

Despite the smaller size of the capex initiatives and net funding requirements ($1.5 billion) in the latest plan compared to the five-year plans announced in October 2009 ($9.8 billion and $3.0 billion, respectively) and October 2008 ($12.2 billion and $6.6 billion, respectively), the Company will continue to experience significant free cash flow deficits, especially in the early years of the current plan, when common dividends ($0.6 billion, of which $0.4 billion was paid in cash, for the last 12 months ending June 30, 2010 (LTM June 30, 2010)) are taken into account. The Company’s commercially secured base capex plan includes debt funding capacity of $4.1 billion (including $2.0 billion for refinancing of debt maturities) from Q4 2010 to year-end 2014. This forecast is based on the Company’s assumption that the $8.8 billion of commercially secured capex is largely funded by $7.3 billion of free cash flow. The forecast also includes $1.2 billion of equity funding from dividend re-investment and employee share ownership plans.

Consequently, DBRS believes that the current capex and funding plans could 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 come onstream and begin to generate cash flow). However, DBRS expects that any such potential weakness would be shallower and shorter in duration than experienced in the 2008-2009 period due to the shorter average construction period for the current portfolio of projects, which are relatively well spread out in terms of expected completion and intial earnings and cash flow contribution.

(3) The Company’s business risk profile improved following completion of the two major liquids pipelines projects noted above. Enbridge’s low-risk, mostly regulated operations provide more than 90% of the Company’s earnings. Enbridge derived approximately one-quarter of its segment earnings for the LTM June 30, 2010 from entities with no external debt (e.g., Athabasca System and Spearhead Pipeline), thereby providing a stream of unencumbered dividends to the Company. The remaining three-quarters of segment earnings are derived mostly from entities with low-risk, regulated operations that generate stable earnings, including Enbridge Gas Distribution Inc. (EGD), Enbridge Pipelines Inc. (EPI) and Enbridge Energy Partners, L.P. (EEP, 27%-owned by Enbridge) accounting for a combined 58% of segment earnings, which also provide a steady stream of dividends to Enbridge.

Enbridge is targeting in excess of 10% compounded annual earnings growth on a per-diluted-share basis from 2010 to 2014, supported by its commercially secured base capex plan. Approximately one-half of the growth capex is related to liquids pipelines growth projects (supported by long-term contracts), with the balance related to natural gas (about 30%) and green energy (about 20%) projects. While DBRS expects the Company’s business risk profile to remain strong following completion of the currently planned projects, DBRS views the green energy projects, which are subject to volume risk and operating and maintenance (O&M) cost increase exposure (following expiry of initial fixed-price O&M contracts), as having moderately higher business risk, although partly mitigated by their long-term contractual arrangements.

Enbridge has maintained adequate liquidity, with approximately $2.3 billion available under unused credit facilities on a consolidated basis at June 30, 2010. During Q3 2010, EPI issued $250 million of 2.93% medium-term notes (MTNs) maturing September 8, 2015, and Enbridge issued $200 million of 4.26% MTNs maturing February 1, 2021, and $100 million of 5.12% MTNs maturing September 28, 2040. The proceeds of all three issues were used to reduce the short-term debt of the Issuer and increase Enbridge’s consolidated liquidity position. The Company’s debt maturities (including $200 million of direct MTN maturities in 2013) are well spread out.

Enbridge’s exposure to equity injections into its subsidiaries has also diminished from recent years. On July 20, 2009, Enbridge and EEP concluded a joint funding agreement under which Enbridge effectively funded two-thirds of the US$1.2 billion ($1.35 billion) cost of the U.S. segment of the Alberta Clipper crude oil pipeline project (Alberta Clipper U.S.), with one-third funded by EEP (previously 100% EEP). Consequently, DBRS believes that the probability that Enbridge would be called upon to inject significant further additional funds into EEP over the near- to medium-term is minimal.

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

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.