DBRS Confirms Ratings on Enbridge Inc. and Enbridge Energy Partners L.P., Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating of Enbridge Inc. (ENB or the Company) at BBB (high) and the ratings on the Company’s Medium-Term Notes & Unsecured Debentures at BBB (high), Fixed-to-Floating Subordinated Notes at BBB (low), Cumulative Redeemable Preferred Shares at Pfd-3 (high) and Commercial Paper (CP) at R-2 (high), all with Stable trends. DBRS also confirmed Enbridge Energy Partners, L.P.’s (EEP) Senior Unsecured Notes at BBB (high) with a Stable trend based on the guarantee of ENB; EEP in turn guarantees ENB’s Medium-Term Notes & Unsecured Debentures. DBRS notes that ENB also guarantees the Senior Unsecured Notes of Spectra Energy Partners, L.P. (SEP), which in turn guarantees ENB’s Medium-Term Notes & Unsecured Debentures.

The confirmations incorporate ENB’s strong business risk profile, supported by (1) significant progress on its strategic plan to reposition its asset mix to a pure regulated pipeline and utility business model (demonstrated by $7.8 billion ($5.7 billion closed to date; balance expected in the second half of 2019) of announced non-core asset sales); (2) progress on its current large portfolio of low-risk capital projects; (3) an improving financial risk profile that is benefiting from ENB’s more conservative recent funding plan (including the expected $4.0 billion consolidated debt reduction through 2020); (4) completion of the corporate simplification transactions and (5) substantial reduction in structural subordination at ENB. The Stable trends incorporate DBRS’s expectation that any incremental investments in new projects would be consistent with maintaining a strong overall business risk profile and medium-term maintenance of key credit metrics with the completion of the current large capex program.

ENB faces rising regulatory and political risks with respect to construction of new liquids pipelines in North America. Such risks are highlighted by the following: (1) The expected in-service date for ENB’s U.S. Line 3 Replacement (L3R) liquids pipeline project (connected to the Canadian portion), which was originally anticipated to be in late 2017, is currently expected in H2 2020. On June 3, 2019, the Minnesota Court of Appeals ruled that the L3R environmental review was inadequate, potentially leading to further project delays. (2) The State of Michigan has sued ENB in an effort to force the closure of Line 5 running through the Straits of Mackinac. Line 5 currently transports 540,000 barrels per day of Alberta crude oil to refineries in southwestern Ontario, as well as petroleum products back to Michigan, and is therefore a material component of the Enbridge/Lakehead System. ENB expects to operate Line 5 as the legal process proceeds, the timing of which is subject to uncertainty.

Commencement of construction of L3R in Minnesota (subject to uncertainty, as noted above), combined with maintenance of improved key credit metrics (including DBRS-adjusted debt to cash flow of at least 15%; 15.9% at March 31, 2019) and satisfactory resolution of the Line 5 situation noted above, could lead to a Positive trend. A negative rating action is not expected over the medium term.

RECENT DEVELOPMENTS: CORPORATE SIMPLIFICATION TRANSACTIONS COMPLETED

DBRS notes the modestly positive impact of ENB’s Q4 2018 Corporate Simplification Transactions and Q1 2019 Cross Guarantees, under which ENB acquired the remaining third-party public floats of its Sponsored Vehicles (listed below):

(1) Transactions
(a) Enbridge Income Fund Holdings Inc. (ENF, which in turn owned a large majority of Enbridge Income Fund’s (EIF) common units). ENB’s economic ownership in the Fund Group (which also includes other entities within the EIF partnership structure) was 82.6% as at September 30, 2018. EIF Medium-Term Notes (MTNs) were subsequently exchanged for ENB MTNs (the ENB-EIF Notes Exchange) and EIF credit facilities were repaid and cancelled, leaving no external debt outstanding at EIF.

(b) EEP and Enbridge Energy Management, LLC (EEQ), in which ENB’s combined economic ownership was 34.2% as at September 30, 2018. In Q1 2019, Cross Guarantees of the MTNs of EEP and ENB were implemented, EEP’s Junior Subordinated Notes, CP and credit facilities were repaid and cancelled. Following implementation of the Cross Guarantees in forms satisfactory to DBRS, DBRS equalized the MTN rating of EEP with that of ENB.

(c) Spectra Energy Partners, L.P. (SEP), in which ENB’s economic ownership was 83.1% as at September 30, 2018. In Q1 2019, Cross Guarantees of the MTNs of SEP and ENB were implemented, SEP’s CP and credit facilities were repaid and cancelled.

ENB issued common stock (and a small cash component in the case of ENF) in exchange for the third-party units/shares of the Sponsored Vehicles to avoid incremental debt leverage at ENB. EEP’s and SEP’s existing MTNs will be repaid as they mature (last maturity for each is in 2045). Future funding requirements at EEP, EIF and SEP (other than at its regulated subsidiaries) will be met from loan advances and equity injections from ENB.

(2) Impact on ENB
(a) The previous significant leakage of cash flow generated at the Sponsored Vehicles and paid as dividends/distributions to their then-current third-party equity owners (approximately $1.1 billion per year) has been eliminated. This allows more of ENB’s DBRS-adjusted consolidated cash flow (approximately $10.4 billion in the last 12 months (LTM) ending March 31, 2019) to reach ENB in the form of dividends received in support of its direct CP, Senior Unsecured Notes, Fixed-to-Floating Subordinated Notes and Cumulative Redeemable Preferred Shares (the Direct Obligations) and the MTNs of EEP and SEP (Guaranteed Obligations). While total ENB common share dividends increased as a result of the common equity transaction consideration (by approximately $0.9 billion on a pro forma basis in 2019), these incremental dividends are paid after ENB’s Direct and Guaranteed Obligations have been met, rather than before (as when paid as dividends/distributions to third-party owners at the Sponsored Vehicles). Given the common equity consideration in the Corporate Simplification Transactions (i.e., minimal incremental debt), these factors support an improved financial profile at ENB.

(b) An increased proportion of ENB’s medium-term funding requirements will be met at ENB rather than at the Sponsored Vehicles. This strategy will likely result in lower overall funding costs, supported by increased investor comfort with the simplified corporate structure.

(c) The negative impact of structural subordination on ENB’s credit profile has been substantially reduced given that debt at EIF has been eliminated and third-party debt at SEP and EEP now ranks pari passu with ENB’s unsecured debt following implementation of the Cross Guarantees.

DBRS estimates that as at March 31, 2019, ENB had approximately $65 billion of total consolidated DBRS-adjusted debt and equivalents outstanding. Following implementation of the ENB-EIF Notes Exchange and the Cross Guarantees, the proportion of ENB’s total consolidated DBRS-adjusted debt and equivalents that are in a structurally superior position to that of ENB’s Direct and Guaranteed Obligations was approximately 35%, a much lower level of structural subordination than prior to these transactions (approximately 63% at September 30, 2018). The vast majority of the remaining structurally superior consolidated subsidiary debt is at regulated entities with strong business risk profiles in ENB’s Liquids Pipelines, Gas Transmission and Gas Distribution business segments.

DBRS also estimates that in the LTM ending March 31, 2019, ENB’s DBRS-adjusted consolidated cash flow was approximately $10.4 billion. Following implementation of the ENB-EIF Notes Exchange and the Cross Guarantees, the proportion of ENB’s total DBRS-adjusted consolidated cash flow that was directly available to meet ENB’s Direct and Guaranteed Obligations was approximately 40% (with the balance generated at ENB’s consolidated subsidiaries with their own direct debt outstanding), a much lower level of structural subordination than prior to these transactions (approximately 20% in the LTM ending September 30, 2018).

(d) The change to 100% indirect ownership of the current Sponsored Vehicles provides ENB with complete control of their operations, as there is no longer a requirement to consider the potential economic impact of decisions on third-party equity holders.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, 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.

ENB guarantees the Senior Unsecured Notes of EEP and Spectra Energy Partners. L.P. (SEP). EEP and SEP guarantee the Medium-Term Notes & Unsecured Debentures of ENB.

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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