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

DBRS Limited (DBRS) confirmed Enbridge Pipelines Inc.’s (EPI or the Company) Issuer Rating and Medium-Term Notes & Unsecured Debentures rating at “A” and its Commercial Paper (CP) rating at R-1 (low). All trends are Stable. The ratings reflect (1) strong results under the ten-year Competitive Tolling Settlement (CTS), effective on July 1, 2011; (2) expected maintenance of the Company’s credit metrics at levels consistent with the current ratings during its current growth phase; and (3) the strong competitive position of the Enbridge System/U.S. Lakehead Pipe Line System, the Canadian portion of which is referred to as the Canadian Mainline (or Mainline) and forms the basis for DBRS’s EPI ratings.

The CTS provides for a joint toll for volumes originating in Western Canada that are transported on the Lakehead System. Under the International Joint Tariff agreement, joint tolls are allocated based on the existing Lakehead System rate structures, resulting in no direct impact to the Lakehead System’s tolls; therefore, any shortfall in tolls (e.g., caused by lower throughput) under the CTS could reduce tolls for the Mainline. The Mainline has benefited from rising throughput (46% increase between 2012 and 2016) due to growing crude oil production, Mainline capacity additions and delayed approvals of competing pipeline projects, resulting in rising earnings and cash flow to date under the CTS, despite the 23% drop in the Mainline’s per-barrel tolls over the above-noted period and weaker crude oil prices since 2014. Crude oil prices, Mainline tolls and throughput have increased in recent quarters, resulting in strong earnings and cash flow growth.

DBRS expects EPI’s credit metrics to remain consistent with the current ratings (e.g., cash flow-to-debt of at least 15%) as it proceeds with construction of the Canadian portion of the Line 3 Replacement (L3R) Program. The $5.3 billion Canadian portion is undertaken by EPI and is expected to be funded in a manner consistent within the Company’s Mainline capital structure target of 55% debt and 45% equity. As at March 31, 2018, approximately $2.5 billion had been spent. In Canada, the first phase of pipeline construction is now complete, with 40% of the pipe now laid. In the United States, the pipeline replacement work in Wisconsin is complete and that segment of the line was commissioned in May. Enbridge Energy Partners, L.P. also has the authorization to replace Line 3 in North Dakota and Minnesota. The current anticipated in-service date for the entire L3R project is in the second half of 2019, following a 12-month construction period in Minnesota.

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 and its strong competitive position. Each of these factors contributes to earnings and cash flow stability. EPI’s Canadian L3R project should support its earnings and cash flow growth by providing rising volumes for delivery of WCSB crude oil to existing and potentially new markets.

Over the medium term, DBRS believes that a positive rating action is unlikely. Although also unlikely, a negative rating action could occur if EPI’s credit metrics were to weaken substantially below current levels on a sustained basis.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.