DBRS Confirms Enbridge Pipelines Inc. at “A” and R-1 (low), Stable Trend

DBRS has today confirmed the Issuer Rating at “A” and the ratings on the Medium-Term Notes & Unsecured Debentures and Commercial Paper of Enbridge Pipelines Inc. (EPI or the Company) at “A” and R-1 (low), respectively, all with Stable trends. The ratings reflect (1) results under the 10-year Competitive Tolling Settlement (CTS) effective on July 1, 2011, (2) potential pressure on the Company’s credit metrics during its current growth phase and (3) the strong competitive position of the Enbridge/Lakehead crude oil pipeline system, the Canadian portion of which is referred to as the “Mainline.” The U.S. Lakehead Pipe Line System (Lakehead System) is owned indirectly through EPI’s 21.8% interest in Enbridge Energy Partners, L.P. (EEP).

The CTS provides for a joint tariff for volumes originating in Western Canada that are transported on the Lakehead System. Under the International Joint Tariff (IJT) agreement, any shortfall in toll revenues (e.g., as a result of lower throughput) under the CTS for the Lakehead System, as compared with its existing agreements, could potentially reduce the toll revenues available to the Mainline. Earnings increased in the nine months ending September 30, 2012 (9M 2012), largely due to higher throughput, as well as a 14% rise in the Mainline IJT residual benchmark toll, due to a Lakehead toll reduction.

The Company’s credit metrics, while relatively strong, could be subject to pressure during its growth phase. Free cash flow deficits would require substantial funding, likely from a combination of external debt as well as debt and equity provided by its parent company, Enbridge Inc. (ENB), which is also directly involved in large-scale growth projects of its own that will require significant external funding.

EPI benefits from strong demand for Western Canadian Sedimentary Basin (WCSB) crude oil in the U.S. Midwest (PADD II), supported by increasing crude oil production, rising pipeline throughput and its strong competitive position. Each of these factors contributes to earnings and cash flow stability. Further, ENB’s commercially secured intra-Alberta liquids pipelines projects (Wood Buffalo and Norealis pipelines, Athabasca and Waupisoo expansions and Athabasca Twinning) should support Mainline earnings growth by providing increasing volumes for delivery of WCSB crude oil to existing and, potentially, new markets. DBRS notes that these projects would be developed and funded at ENB subsidiaries other than EPI.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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