DBRS Comments on Enbridge Income Fund’s Announcement to Acquire a 50% Interest in Alliance USA and Investment in Southern Lights’ Class A Units

DBRS notes today that Enbridge Income Fund (EIF or the Company; rated BBB (high) with a Stable trend) has announced that it has entered into an agreement to acquire a 50% interest in Alliance Pipeline L.P. (Alliance USA; rated A (low) with a Stable trend) and an investment in Class A Units of Southern Lights LLC (U.S.) and Enbridge Southern Lights Holding LP (Canada) (collectively Southern Lights) from its parent Enbridge Inc. (Enbridge; rated A (low) with a Stable trend) for $1.76 billion (the Acquisition). DBRS views that the Acquisition is not expected to have a material impact on EIF’s credit profile, reflecting predictable cash flow from the Acquisition, which is supported by long-term take-or-pay contracts at Southern Lights, and the strong credit profile of Alliance USA. DBRS notes that Alliance USA is currently facing re-contracting risk as most of its current take-or-pay contracts will expire December 1, 2015. The proposed Acquisition is subject to regulatory approvals and other customary closing conditions and the Company expects the Acquisition will be completed in November 2014.

The proposed Acquisition includes the following assets: (1) a 50% interest in Alliance USA, which owns the U.S. portion of the Alliance Pipeline system running from Northeast British Columbia and Alberta to the Chicago area. The Alliance Pipeline system has a capacity of approximately 1.6 billion cubic feet/day (Bcf/d), of which 1.3 Bcf/d is under take-or-pay contract with strong creditworthy counterparties; (2) investment in Class A Units in Southern Lights, which indirectly owns the Enbridge Southern Light diluent pipeline system (ESL System) running from Manhattan, Illinois, to Edmonton, Alberta. The ESL System has a capacity of 180,000 barrels/day, 90% of which is under take-or-pay contracts with mostly strong counterparties. The Southern Lights contracts expire in 2025.

The impact of the proposed Acquisition on EIF’s business risk profile is viewed as modestly positive reflecting the following factors: (1) predictable cash flow from Alliance USA and Southern Lights due to their take-or-pay contracts; (2) following the Acquisition, EIF’s EBIT exposure to volume risk is expected to be reduced to approximately 36% from current levels of approximately 51%; (3) 90% of Southern Lights’ capacity is under long-term take-or-pay contracts, with no volume risk and no commodity price risk; and (4) Alliance USA is a cost-effective pipeline system, which is strategically located in good proximity to prolific liquids rich shale plays, such as Montney, Durvernay, Cardium and Bakken. However, DBRS notes that these factors are partially offset by the expiry of most of the Alliance USA contracts on December 1, 2015, which presents re-contracting risk. Future competition and economic conditions could force Alliance USA to realize lower earnings and cash flow.

Based on DBRS’s view of EIF’s Acquisition financing plan, DBRS believes that the impact on the financial risk profile is expected to be neutral. EIF intends to finance the Acquisition with a mix of equity (50%) and debt (50%). As a result, EIF’s pro forma non-consolidated debt leverage is expected to remain neutral, while pro forma non-consolidated cash flow and interest coverage metrics are expected to have a very modest, negative impact. Overall, DBRS does not expect the financing of the proposed Acquisition to have a material impact on the Company’s financial risk profile. However, should the actual financing plan deviate materially from the proposed financing to the extent that EIF’s credit’s metrics would weaken, DBRS could take a negative rating action.

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

The applicable methodology is Rating Pipeline and Diversified Energy Companies, which can be found on our web site under Methodologies.