DBRS Confirms Enbridge Income Fund at BBB (high), Stable Trend

DBRS has today confirmed the Senior Unsecured Long-Term Notes rating of Enbridge Income Fund (EIF or the Fund) at BBB (high) with a Stable trend. The confirmation follows the announcement that the board of trustees of Enbridge Commercial Trust (ECT), on behalf of EIF, approved the acquisition by the Fund of three renewable energy assets in Ontario (total generating capacity of 369 megawatts (MW)) for $1.23 billion (the Transaction) from Enbridge Inc. (Enbridge), which currently has a 72% economic interest in the Fund. This removes the rating from Under Review with Developing Implications, where it was placed on May 4, 2011, following the announcement that the Fund had received the Transaction proposal from Enbridge.

The Fund intends to finance the Transaction through a combination of debt and equity. The board of directors of Enbridge Income Fund Holdings Inc. (EIFHI, which directly owns EIF’s outstanding trust units), has approved the offering of common shares to finance EIFHI’s related investment in the Fund. EIFHI will seek shareholder approval of the Transaction at a special meeting to be held on October 17, 2011. Subject to completion of the financing, receipt of regulatory and third-party approvals and shareholder approval, the Transaction is expected to close shortly thereafter. The Transaction is expected to be accretive to EIFHI’s cash flow by approximately 7.5% per share on a long-term basis. The transaction value equates to approximately 11 times average annual EBITDA from the Transaction assets over a ten-year period.

DBRS believes that the Transaction will result in a slightly positive impact on EIF’s business risk due to increased diversification of its operations as well as the long-term contractual arrangements with a highly-rated entity supporting the Transaction assets. These factors are partly offset by modestly higher volume risk of the Transaction assets compared with the Fund’s pipeline assets. DBRS also expects that completion of the Transaction, combined with the impact of the ongoing Bakken crude oil pipeline expansion, will result in a moderately weaker financial profile and less credit metric flexibility at the current rating over the next two years. The current rating assumes that the Fund’s credit metrics will improve in the subsequent period as the benefits of the Bakken expansion are realized.

A special committee of EIF’s independent board members reviewed the Transaction, which is expected to be funded with a combination of debt and equity, as discussed in more detail below. Enbridge’s economic interest in the Fund would be reduced from 72% to 69% upon completion of the Transaction. DBRS notes that all Transaction facilities are supported by asset-specific long-term contracts (remaining terms exceed 17 years) with Ontario Power Authority (rated A (high)) and are expected to generate EBIT returns in the low-teens percentage range. While output and earnings from renewable wind and solar generating facilities are sensitive to wind and solar conditions, resulting in more volume risks than EIF’s current pipeline-focused businesses, the underlying assumptions used to evaluate the Transaction economics are reasonable. The Transaction assets represent significant additions to EIF’s operations, effectively doubling the Fund’s asset base, and provide considerable diversification from its pipeline-focused businesses.

EIF’s financial risk will rise initially, based on the financing of the Transaction. DBRS notes that EIF intends to finance the Transaction with an appropriate combination of debt and equity, which DBRS expects to be consistent with EIF’s existing non-consolidated capital structure in order to maintain its existing credit rating. Assuming a 53/47 debt/equity funding mix, DBRS estimates pro forma non-consolidated debt-to-capital of approximately 50% (45% at June 30, 2011). The non-consolidated 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.

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.