DBRS Confirms Enbridge Pipelines Inc. at A (high) and R-1 (low)

DBRS has today confirmed the Medium-Term Notes & Unsecured Debentures and Commercial Paper ratings of Enbridge Pipelines Inc. (EPI or the Company) at A (high) and R-1 (low), respectively, both with Stable trends.

The confirmation reflects the completion of EPI’s large multi-year capex program, expected improvement in the Company’s credit metrics in the second half of 2010 and in 2011, and its low-risk business profile due to the strong regulatory environment and long-term contractual arrangements.

While EPI’s credit ratios have been weakened as a result of the Company’s large capex program (approximately $1.3 billion in 2008 and $1.6 billion in 2009; down to $0.4 billion in 2010), DBRS believes that EPI is on track to substantially restore its key Mainline credit metrics (including its cash flow-to-debt ratio to the top half of the 15% to 20% range and EBIT interest coverage ratio to the mid-three times range compared with 12.9% and 3.4 times 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) on April 1, 2010, both supported by the long-term cost-of-service rolled-in tolling methodology, provided cash earnings and cash flow from their respective in-service dates. DBRS’s analysis of EPI is focused on the Mainline’s financial statements, which include Line 4 Extension and Alberta Clipper Canada and exclude inter-company transactions (in place for capital efficiency purposes) and investments held in subsidiaries of EPI from the consolidated financial statements.

The Mainline operations support all of EPI’s direct external debt and accounted for about 60% of consolidated EPI earnings in 2009.

The Company’s funding requirements are significantly diminished relative to 2008-2009 levels given its more modest $0.4 billion capex program in 2010. Of this amount, approximately $0.1 billion was spent on Alberta Clipper Canada in 6M 2010. Given its reduced funding requirements, EPI has reduced the size of its commercial paper program to $200 million (from $300 million), fully backstopped by a $200 million 364-day revolving committed credit facility with an available term-out option to May 2012. On September 8, 2010, EPI issued $250 million of 2.93% medium-term notes maturing on September 8, 2015, the proceeds of which were used to reduce short-term debt, thereby improving its liquidity position. The Company’s debt maturities (including $250 million in Q4 2012) are manageable.

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 its parent company, Enbridge Inc. (ENB), are exploring additional projects, including upstream liquids pipeline development (e.g., Woodland Pipeline and Waupisoo Pipeline Expansion) to further increase access to U.S. markets for WCSB crude oil beyond 2011. DBRS notes that these projects would be developed and funded at ENB subsidiaries other than EPI. The completed Line 4 Extension and Alberta Clipper Canada projects are regulated under the long-term cost-of-service rolled-in tolling methodology, protecting EPI against volume risk, property taxes and power costs.

The Company’s Incentive Tolling Settlement (ITS), which applies to the legacy portion of the Mainline’s system (see the Regulation section of this report), has reduced regulatory uncertainty and protected EPI from volume risk, resulting in earnings stability. In May 2010, the National Energy Board (NEB) approved an agreement between EPI and the Canadian Association of Petroleum Producers (CAPP) for a one-year ITS for 2010 (the 2010 ITS), which maintains volume protection for Mainline System revenues. The 2010 ITS increased the percentage of flow-through costs, retained 100% of cost savings, eliminated performance metrics included in the previous agreement and preserved an acceptable return for the Mainline. Expiry of the 2010 ITS in December 2010 exposes the Company to potential risks with respect to the final negotiated terms of any ITS extension. Approval of unfavourable terms could have a potentially negative impact on the Company’s credit metrics, although, based on previously negotiated settlements, and the fact that the legacy system accounted for only 26% of Mainline’s earnings in 2009 (down from 46% in 2005), DBRS does not expect this to be a material issue.

EPI owns and operates the Canadian portion (Enbridge System or Mainline) of the largest low-cost crude oil pipeline from the WCSB to major Canadian and PADD II markets. The Enbridge/Lakehead System has consistently provided the most economic route for WCSB producers shipping crude oil to PADD II/Chicago. In 2009, its volumes (2.1 million b/d) were equivalent to 84% of total WCSB crude oil production, providing 76% of Canadian export capacity. Its capacity was expanded with the April 1, 2010, completion of Alberta Clipper, which has an initial capacity of 450,000 b/d (expandable to 800,000 b/d) of crude oil pipeline capacity from Hardisty, Alberta, to Superior, Wisconsin, where it provides access to multiple delivery points and storage options, including Chicago and Patoka. Alberta Clipper is very competitive given its long-term contracts, cost-of-service and rolled-in tolling methodology. Given favourable market conditions, PADD II is likely to remain the preferred market (generating the highest netbacks) for WCSB producers versus the U.S. Rocky Mountains (PADD IV) or the U.S. Pacific Northwest (PADD V).

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.