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

DBRS has today has confirmed the Issuer Rating and the Senior Unsecured Long-Term Notes rating of Enbridge Income Fund (EIF or the Fund) at BBB (high), with a Stable trend, following the Fund’s announcement that it has agreed to acquire crude oil storage and renewable generation assets (the Assets) from Enbridge Inc. and certain of its subsidiaries (collectively, Enbridge) for approximately $1.164 billion (the Transaction) or a 12-times EBITDA multiple (on a pro forma basis). After a review of the proposed acquisition, including the Fund’s intention to finance the Transaction with 50% debt and 50% equity, DBRS views the Transaction as neutral from a business risk perspective. However, DBRS notes that the Fund’s current business risk profile is weaker than it was before the October 2011 acquisition. DBRS is of the opinion that any further acquisition (externally or internally) of assets riskier than the Fund’s current portfolio could result in a negative rating action.

DBRS also remains concerned about the impact of the Transaction on the Fund’s key credit metrics, which have been weakening since 2009. The rating confirmation is based on DBRS’s expectation that over the next 12 months, the Fund will take appropriate measures to improve its credit metrics as follows: the cash flow-to-debt ratio to be at or close to 20% (17.8% for 12 months to June 2012) and the modified debt-to-capital ratio to be in the low 50% range (currently 55%). The Fund’s current ratings continue to be supported by a diversified source of predictable cash flow from Alliance Canada, the Saskatchewan Pipeline System (SPS), and Green Power (mostly from wind generation with long-term contracts with strong counterparties).

The Assets in the proposed acquisition are free of debt and consist of the two following packages:
(1) Crude oil storage assets located in Hardisty, Alberta. These assets include (a) 7.5 million barrels of above-ground crude oil storage capacity with take-or-pay contracts (approximately 80% of revenue from fixed-fee contracts) for a minimum of 17–24 years (with Enbridge providing the first 15-year extension and an option for a second 15-year extension term) and (b) 3.5 million barrels of storage caverns, which are fully contracted with approximately 98% fixed fee revenue for a remaining term of 23 years.
(2) Renewable power generation assets located in Ontario. These assets are comprised of (a) Greenwich Wind: 99 megawatt (MW) wind power with 19 years remaining on a power purchase agreement (PPA) with Ontario Power Authority (OPA, rated A (high)); (b) Amherstburg Solar: 15 MW solar power generation facility with 19 years remaining on a PPA with the OPA; and (c) Tilbury Solar: 5 MW solar power facility with 18 years remaining on a PPA with the OPA.

The Transaction, expected to close in December 2012, is subject to regulatory and third-party approvals. The Fund intends to finance the Transaction with a balance of 50% debt and 50% equity. Enbridge is expected to reduce its economic interest in the Fund to 67.8% (currently 69.19%) and continue to own all preferred shares.

In its review of the proposed acquisition, DBRS assessed its impact on the Fund’s business risk profile, including the long-term contracts of the assets and the potential benefits with respect to diversification of cash flow sources to the Fund. DBRS also assessed the Fund’s financing strategy and the impact on its credit metrics.

Business Risk Profile – Neutral
The Fund currently generates approximately 51% of its EBITDA (on a cash basis) from Alliance Canada and SPS, with the remainder from Green Power, mostly wind generation assets. The Transaction, cash flow accretive immediately, would only have a minimal impact on the stability of the current EBITDA, as over 50% of the incremental EBITDA is expected to be contributed from storage assets, which benefit from fixed-fee take-or-pay contracts with limited exposure to volume risk. In addition, storage assets are located in a strategic location (Hardisty), providing for good utilization of storage capacity. However, incremental EBITDA from renewable assets (under 50%) are exposed to volume risk (especially wind and solar power due to their sensitivity to weather conditions). The Assets benefit from good credit counterparties. DBRS views the risk profile of storage assets as similar to that of the cost-of-service (COS) pipeline businesses. As a result, the Transaction will be neutral to the business risk profile. In addition, DBRS notes that the business risk profile of the Fund is expected to improve once the Bakken Oil Pipeline Expansion project is in service (expected in late 2013). On a pro forma basis for 2014, the EBITDA mix to the Fund is expected to be 60% from COS pipelines and storage and 40% from Green Power assets that are exposed to volume risk. However, as noted above, DBRS is of the opinion that any further acquisition (externally or internally) of assets riskier than the Fund’s current portfolio could result in a negative rating action.

Financial Risk Profile – Slightly Negative
EIF intends to finance the Transaction with 50% debt and 50% equity (including issuing the Fund’s Common Units and Preferred Shares (through Enbridge Income Fund Holdings)). DBRS notes that the Fund’s credit metrics have weakened since 2009 due to consistently high distributions and the October 2011 acquisition of renewable assets from Enbridge (due to the debt component of the acquisition). DBRS believes that the Transaction would further weaken the Fund’s credit metrics (albeit modestly). This financing is not expected to change the current debt-to-capital ratio (current at 55%), but is expected to reduce the cash flow-to-debt ratio to 15.7% (pro forma based on the full-year impact of the proposed dropdown) from 17.8% in June 2012. However, the rating confirmation assumes that the Fund will take appropriate measures to improve its credit metrics within the next 12 months as indicated above. Should these metrics not improve as expected, a negative rating action could result.

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

The applicable methodology is Rating North American Pipeline and Diversified Energy Companies (May 2011), which can be found on the DBRS website under Methodologies.