DBRS Places Enbridge Income Fund Under Review - Developing

DBRS has today placed the BBB (high) Senior Unsecured Long-Term Notes rating of Enbridge Income Fund (EIF) Under Review with Developing Implications. The rating action follows EIF’s announcement that it has received a proposal to acquire from its 42% owner, Enbridge Inc. (Enbridge), several operating renewable energy assets in Ontario (total generating capacity of 369 megawatt (MW)) for $1.3 billion (the Transaction), subject to board and other approvals. EIF’s independent board members will form a special committee to review the Transaction (Special Committee), which is expected to be funded with a combination of debt and equity as discussed in more detail below. Enbridge will likely retain ownership interests close to the current levels. The Transaction is expected to be accretive to earnings and cash flow, with the closing date to be determined. DBRS notes from Enbridge’s previous public presentations that all facilities mentioned above are supported by respective long-term contracts with Ontario Power Authority (rated A (high)). However, output and earnings from renewable wind and solar generating facilities are sensitive to wind and solar conditions, resulting in more operating risks than EIF’s current pipeline-focused businesses. While smaller in scale within the much larger Enbridge operations, the assets included in the Transaction represent significant additions to EIF’s operations, which could effectively double its asset base and provide considerable diversification from its pipeline-focused businesses.

Based on its preliminary review, DBRS expects the Transaction to have a slightly positive impact on EIF’s business risk due to the increased diversification and the long-term contractual arrangements supporting these assets with a highly rated entity, partly offset by increased operating risk. Enbridge has previously indicated that returns in the low teens are estimated for these projects. EIF’s financial risk may initially rise, based on the related interim financing of the Transaction. DBRS notes EIF’s intention to finance the Transaction, should it be approved by the Special Committee, with an appropriate combination of debt and equity, which DBRS expects to be consistent with EIF’s existing unconsolidated capital structure in order to maintain its existing credit rating. Assuming a 50/50 debt/equity funding mix, DBRS estimates pro forma unconsolidated debt-to-capital of approximately 47% (43% at December 31, 2010), based on the December 31, 2010, operating results. The unconsolidated debt ratio is a more meaningful measure as the consolidated debt includes the proportional consolidation of non-recourse debt of Alliance Pipeline Limited Partnership, which is self-financing.

DBRS’s review of the Transaction will focus on, among other factors, the impact of the acquisition on EIF’s business and financial risk (including the proposed capital structure post-acquisition), its operating capacity and related tax, regulatory, legal and contractual issues.

The Transaction involves the purchase of 100% partnership interests in three renewable energy assets in Ontario: the Enbridge Ontario Wind (190 MW), Talbot Wind (99 MW) and Sarnia Solar (80 MW) projects, which are all debt free and complementary to EIF’s existing three small wind investments and waste-heat power assets in Western Canada

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies, which can be found on the DBRS website under Methodologies.