DBRS Confirms Enbridge Income Fund at BBB (high), Trends Changed to Stable from Positive

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Long-Term Notes rating of Enbridge Income Fund (EIF or the Fund) at BBB (high). The trends of both ratings have been changed to Stable from Positive. The debt issued by the Fund is irrevocably and unconditionally guaranteed (the Guarantees) by Enbridge Income Partners LP (EIPLP), Enbridge Income Partners Holdings Inc. (EIPH), Enbridge Income Partners GP Inc. (EIPGP) and Enbridge Commercial Trust (ECT) (collectively, the Guarantors).

On August 20, 2015, DBRS changed the trends of all of the Fund’s ratings to Positive following the approval by the shareholders of Enbridge Income Fund Holdings Inc. (EIFH) of Enbridge Inc.’s (ENB) transfer of its Canadian liquids pipelines business, as well as certain renewable power generation assets (the Dropdown) to EIPLP (see DBRS press release dated August 20, 2015, for further details). The Guarantees of the Fund’s direct debt have been in place since 2004 and remain unchanged following the Dropdown.

The Dropdown plan was first thought to significantly improve the credit profile of the Fund, as the Fund’s business risk profile would benefit from EIPLP’s (one of the Guarantors) direct ownership of Enbridge Pipelines Inc. (EPI) and Enbridge Pipelines (Athabasca) Inc. (EPA), which accounted for most of the Dropdown assets. EPI, alone accounting for over 50% of the EIPLP’s consolidated cash flow, has a strong business risk profile, supported by its Canadian Mainline, which serves as a basis for the rating of “A” on EPI by DBRS. However, it is now DBRS’s view that the benefit of EIPLP’s direct ownership of EPI and EPA is partially offset by recent developments, which have increased its business risk and uncertainty, including (1) a prolonged weak energy price environment, which has a significantly negative impact on the producers/shippers; and (2) the delay of EPI’s Line 3 Replacement (L3R) program, which extends the period of high capex until early 2019 instead of late 2017. While the negative impact of prolonged weak energy prices is mitigated by current contractual arrangements in place for the EIPLP’s core assets, the pipeline industry in general faces higher counterparty risk and re-contracting risk as the shippers’ credit quality has weakened. Furthermore, the delay of the L3R program will create a longer period of uncertainty with respect to EPI’s project execution risk, cost overruns and funding requirements. As a result, although DBRS continues to acknowledge the positive impact of the Dropdown on the Fund’s business risk profile, DBRS no longer believes that the Positive trend can be maintained as the benefits of the Dropdown will take longer to materialize than originally expected.

DBRS notes that the Fund’s financial results for H1 2016 were consistent with expectation. The Fund’s ratings over the medium term will be dependent on progress with respect to its large, medium-term capex program and its financial performance, as well as the expected improvement of its credit metrics upon the completion of the L3R project.

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 methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (December 2015), DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), DBRS Criteria: Guarantees and Other Forms of Support (February 2016) and DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments – Non-Financial Companies (April 2016), which can be found on our website under Methodologies.

Enbridge Income Fund’s Senior Unsecured Long-Term Notes are guaranteed by EIPLP, EIPH, EIPGP and ECT.