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” as well as its Commercial Paper rating at R-1 (low). All trends are Stable. The Company’s ratings reflect (1) strong results under the ten-year Competitive Tolling Settlement (CTS) effective July 1, 2011; (2) expected maintenance of its 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 (the Canadian Mainline or the Mainline) is owned by EPI.

The CTS provides for a joint toll for volumes originating in Western Canada that are also transported on the Lakehead System. Under the International Joint Tariff agreement, joint tolls are allocated based on the existing Lakehead System rate structures; 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 as a result of growing crude oil production, Mainline capacity additions and delayed approvals of competing pipeline projects. DBRS notes that EPI is in discussions with shippers for a new Mainline tolling agreement to replace the CTS in mid-2021.

DBRS expects EPI’s credit metrics to remain consistent with the current ratings as it awaits approval to place the Canadian portion of the Line 3 Replacement (L3R) Program into service. The $5.3 billion Canadian portion is expected to be funded in a manner consistent with the Company’s Mainline capital structure target of 55% debt and 45% equity. As at March 31, 2019, EPI had spent $4.4 billion and pipeline construction was completed in May 2019. In the United States, Enbridge Energy Partners, L.P. (EEP; rated BBB (high) with a Stable trend by DBRS) is progressing the U.S. portion of L3R. In Q1 2019, the anticipated in-service date for the entire L3R project was delayed by one year to the second half of 2020. Minnesota is the only jurisdiction in which the L3R permitting process is still underway. In June 2019, the Minnesota Court of Appeals ruled that the L3R environmental review was inadequate, potentially leading to further project delays, which would delay the economic benefits of placing the Canadian L3R into service.

EPI’s strong key credit metrics in 2018 and Q1 2019 reflect rising throughput, a higher U.S.-dollar toll on the Mainline (largely caused by reduced Lakehead tolls) and a higher foreign-exchange hedge rate used to record Mainline revenues. DBRS expects a portion of the positive impact of the higher Mainline U.S.-dollar toll on earnings and cash flow to be reversed in the near term following completion of Enbridge Inc.’s (rated BBB (high) with a Stable trend by DBRS) buy-in of EEP on December 20, 2018, which resolved an issue that had lowered the average toll on the Lakehead System earlier in 2018.

Over the medium term, DBRS believes that a positive rating action is unlikely. A negative rating action is also unlikely, but could occur if EPI’s credit metrics 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 & Criteria.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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