DBRS Downgrades Enbridge Inc. to BBB (high), Pfd-3 (high), R-2 (high), Stable Trends

DBRS Limited (DBRS) has today downgraded Enbridge Inc.’s (ENB) Issuer Rating and Medium-Term Notes & Unsecured Debentures rating to BBB (high) from A (low), Commercial Paper rating to R-2 (high) from R-1 (low) and Cumulative Redeemable Preferred Shares rating to Pfd-3 (high) from Pfd-2 (low). The trends are all Stable. ENB’s ratings were placed Under Review with Developing Implications on December 3, 2014, and changed to Under Review with Negative Implications on June 19, 2015 (please see DBRS press releases for details). The current action removes the ratings from Under Review with Negative Implications.

The ENB ratings downgrade is consistent with DBRS’s expectations as noted in the June 19, 2015, press release and follows today’s approval by the public shareholders of Enbridge Income Fund Holdings Inc. (EIFH) of the Transaction described below. For the rationale for the downgrade of ENB’s ratings, please see “Impact on ENB – Update”, below.

BACKGROUND
The December 3, 2014, placement of ENB’s ratings Under Review with Developing Implications by DBRS followed the announcement that ENB planned to transfer its Canadian liquids pipelines business, consisting of Enbridge Pipelines Inc. (EPI) and Enbridge Pipelines (Athabasca) Inc. (EPA) as well as certain renewable power generation assets (held within EPI) to its Canadian affiliate, Enbridge Income Fund (EIF) (the Transaction). Secondly, ENB also announced plans to increase its common share dividend by 33% and its common share dividend policy to a range of 75% to 85% of adjusted earnings from the previous range of 60% to 70%. Finally, ENB announced that it was considering the potential for public debtholders of ENB to exchange up to approximately $4 billion of ENB debt for new notes of EIF.

In addition to the Transaction, during Q4 2014, ENB and EPI began formalizing a plan to transfer EPI’s ownership interest in Enbridge Energy Company, Inc. (EECI) to ENB (the EECI Transfer). EECI directly holds U.S. assets, which include certain liquids pipeline assets, Enbridge Energy Partners, L.P. and certain renewable energy projects.

The June 19, 2015, change in the Under Review status of ENB’s ratings to Negative by DBRS followed the announcement that ENB and EIF had reached an agreement to proceed with the Transaction. ENB decided not to proceed with a debt exchange with EIF. The EECI Transfer was completed on August 10, 2015. The Transaction is subject to customary regulatory approvals and closing conditions. The public shareholders of EIFH approved the Transaction on August 20, 2015, with closing expected to follow shortly.

IMPACT ON ENB - UPDATE
Following its review of the EIFH Management Information Circular (MIC), DBRS continues to believe that the combination of the Transaction and the EECI Transfer have negatively impacted ENB’s credit risk profile. Please see the June 19, 2015, DBRS press release for the main factors leading to that conclusion.

Prior to closing, EPA will issue a senior unsecured promissory note to ENB with a principal amount of approximately $4.1 billion (the Mirror Note), representing a portion of the required capitalization of EPA. Payments of principal and interest by EPA thereunder have been structured to mirror the payments of certain principal and interest required under certain Canadian MTNs issued by ENB.

While DBRS recognizes that the $4.1 billion Mirror Note provides ENB with a senior claim on EPA assets ranking ahead of EIF bond holder claims, this factor does not fully offset the increased structural subordination with respect to EPI’s assets and the loss of full access to EPA cash flows available prior to the Transaction.

Based on its review, DBRS has downgraded all of ENB’s ratings by one notch, with Stable trends following completion of the Transaction.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (January 2015), Rating Holding Companies and Their Subsidiaries (January 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.