DBRS Confirms Enbridge Income Fund at BBB (high), Positive Trends

DBRS Limited (DBRS) has today removed Enbridge Income Fund (EIF or the Fund) from Under Review with Developing Implications and confirmed its Issuer Rating and the rating of its Senior Unsecured Long-Term Notes at BBB (high). The trends are Positive.

The rating actions follow today’s approval of the shareholders of Enbridge Income Fund Holdings Inc. (EIFH), relating to the transaction in which Enbridge Inc. (ENB) plans 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 (which are currently held within EPI) to the Fund (the Transaction) (see DBRS press release dated June 19, 2015, for further details).

BACKGROUND
On December 3, 2014, DBRS placed EIF’s ratings Under Review with Developing Implications following the announcement that ENB planned the above-noted Transaction. DBRS noted that the proposed Transaction was expected to result in a positive impact on the Fund’s business risk profile. DBRS also noted that, from a financial profile perspective, the proposed Transaction was expected to increase cash flow to the Fund materially, while the Fund’s direct debt could increase significantly to $6.5 billion from $2.5 billion due to the potential intercompany loan exchange (the Debt Exchange) between ENB and the Fund (see DBRS press release dated December 3, 2014, for further details).

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, wholly owned by EPI) to ENB (the EECI Transfer). EECI directly holds the U.S. assets of EPI, which include certain liquids pipeline assets, Enbridge Energy Partners, L.P. (EEP) and certain of EPI’s renewable energy projects. The EECI Transfer was completed August 10, 2015. In DBRS’s view, the EECI Transfer has no impact on the Fund’s credit profile.

On June 19, 2015, DBRS maintained the Fund’s Under Review with Developing Implication status following the announcement that ENB and the Fund had reached an agreement to proceed with the Transaction. The Transaction is subject to customary regulatory approvals and closing conditions with closing expected to follow shortly. ENB did not proceed with the Debt Exchange; instead, it will inject approximately $4.1 billion in intercompany loans into EPA. DBRS noted that it expects to confirm EIF’s ratings at BBB (high) and assign a Positive trend upon completion of the Transaction.

IMPACT ON EIF – UPDATE
Following its review of the EIFH Management Information Circular (MIC), DBRS continues to believe that the Transaction will have a positive impact on the Fund’s credit profile. This is based on DBRS’s view that following the Transaction, with the addition of EPI and EPA (the Transferred Assets), the Fund will own a much larger and more diversified portfolio of low-risk assets than pre-Transaction. In the June 19, 2015, press release, DBRS noted that the vast majority of the Transferred Assets are liquids pipeline assets supported by low-risk, long-term contractual and/or regulatory frameworks with minimum volume risk and no price risk, and that the positive impact also reflects that dividends from the Transferred Assets will have to service the EIF debt before being distributed to ENB and EIFH.

From a financial risk perspective, DBRS expects a positive impact on the Fund’s modified-consolidated metrics, reflecting a significant increase in cash distributions from EPI and EPA to the Fund, while the Fund’s external debt remains unchanged (immediately following the Transaction) and will increase gradually and modestly over time as the Fund will issue debt to finance EPA’s capex program. Post-Transaction, the equity portion of EPI’s funding of its capex program will be financed with common equity from the Fund, while EPI will issue its own debt. DBRS expects EPI’s debt-to-capital target to remain unchanged at 45% equity and 55% debt.

However, following the Transaction, the debt at the Fund will be structurally subordinated to the debt at EPI and the intercompany loans between ENB and EPA (approximately $4.1 billion). In addition, DBRS expects that following the Transaction, the Fund and/or its direct parent, EIFH, will have to provide (1) substantial common equity support for EPI’s capex program, instead of ENB under the current structure, and (2) the debt and equity support for EPA’s capex program. DBRS believes that the change in the source of equity funding could result in common equity overhang at EIFH, as this entity has a limited track record of large-scale capital raise. However, EIFH’s common equity issuance is expected to be backstopped by common equity injection by ENB, as ENB and EIFH will enter into an agreement under which ENB will provide equity support in the event that EIFH chooses not to issue equity.

Notwithstanding the expected positive impact of the Transaction on the Fund’s business risk and financial risk profiles, due to substantial common equity requirements and potential project execution risk at EPI and the financing of EPA through 2018, DBRS views that the Fund could be upgraded should the positive impact on the Fund’s modified-consolidated (i.e. treating EPI and EPA as equity investments of EIF) credit metrics materialize as expected and be sustained over the next 12 to 18 months (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 methodology is Rating Companies in the Pipeline and Diversified Energy Industry (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.