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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Enbridge Inc. (ENB or the Company) at BBB (high) and the ratings on the Company’s Senior Unsecured Notes at BBB (high), Subordinated Notes at BBB (low), Preferred Shares at Pfd-3 (high), and Commercial Paper (CP) at R-2 (high). All trends remain Stable. DBRS Morningstar 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 Senior Unsecured Notes. ENB also guarantees the Senior Unsecured Notes of Spectra Energy Partners, L.P. (SEP), which in turn guarantees ENB’s Senior Unsecured Notes.

The confirmations incorporate ENB’s strong credit profile, supported by (1) its focus on maintaining a pure regulated pipeline and utility business model as demonstrated by the composition of its portfolio of secured growth projects (as at March 31, 2021, approximately $5 billion remained to be funded on its $11 billion of projects through 2024), all of which are supported by regulatory and/or long-term contractual arrangements; (2) significant progress on its large portfolio of low-risk capital projects, reducing the construction program to approximately $5 billion remaining as at March 31, 2021, from the peak of approximately $32 billion in Q4 2017; (3) an improved financial risk profile and reduced structural subordination, benefitting from ENB’s more conservative funding strategy since Q3 2018; and (4) substantial liquidity (approximately $7.9 billion of consolidated availability as at March 31, 2021, from various credit facilities, sufficient to fund at least one year of consolidated funding requirements) in support of an active debt issuance program providing funding support for both new project financing and debt refinancing. The Stable trends incorporate DBRS Morningstar’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 capital expenditures program.

DBRS Morningstar notes that ENB currently faces certain issues within its largest segment, Liquids Pipelines (54% of DBRS Morningstar-adjusted segment EBITDA in the last 12 months ended March 31, 2021).

First, in late March 2020, volumes on the Enbridge/Lakehead System (Mainline; 32% of DBRS Morningstar-adjusted segment EBITDA) began to decline as a result of lower supply of, and demand for, crude oil and other liquids shipped on its pipelines, mainly related to the economic lockdowns resulting from the spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between Russia and OPEC. While the coronavirus pandemic resulted in declines in Canadian Mainline throughput in Q2 2020 through Q4 2020 relative to the respective quarters in the prior year, the negative impact was temporary as throughput in Q1 2021 was only 3.4% below that of Q1 2020, which was a record quarter for volumes.

Second, ENB faces rising regulatory and political risks with respect to construction of new, and maintenance of existing, liquids pipelines in North America. Such risks are highlighted by the following:

(1) The expected in-service date for EEP’s U.S. L3R liquids pipeline project (connected to the completed Canadian portion) was originally in late 2017, but, following numerous delays, is now expected in Q4 2021.

(2) The State of Michigan continues to sue ENB in an effort to force the closure of the section of Line 5 running through the Straits of Mackinac. Line 5 transports approximately 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 continue to operate the pipeline as the legal process proceeds.

Finally, DBRS Morningstar notes that Enbridge/Lakehead System tolls are currently determined under the 10-year Competitive Tolling Settlement (CTS) (which has been extended from its June 30, 2021, expiry date), resulting in volume and operational risks through its fixed-toll methodology. On December 1, 2019, ENB submitted an application to the Canada Energy Regulator to implement contracting on the Mainline to replace CTS. Key features of the toll proposal include (1) priority access and toll certainty for contracted volumes, (2) contract terms of up to 20 years, (3) contracts tailored to shipper type, and (4) spot capacity availability of at least 10%. While a majority of current shippers support the application, a minority of shippers have dissented, resulting in requirement for the full regulatory process. DBRS Morningstar notes that, while the recent challenging crude oil market conditions have negatively affected the credit quality of shippers on the Mainline, the vast majority remain of investment-grade credit quality.

Over the near to medium term, DBRS Morningstar expects (1) completion of the L3R construction program in Minnesota, which is expected during Q4 2021; (2) maintenance of key credit metrics, including consolidated cash flow-to-debt and equivalents of at least 15% (16.3% at March 31, 2021) going forward; and (3) replacement of the CTS on a basis that maintains the Mainline’s strong competitive position. In the absence of any materially negative developments, DBRS Morningstar expects to take positive rating actions on all of ENB’s and EEP’s ratings upon successful resolution of the Line 5 dispute. A negative rating action is not expected over the medium term and would likely only occur in a worst-case scenario in which a worse-than-expected negative impact results from a shutdown of Line 5 in Michigan or any materially negative changes to ENB’s financial policies. DBRS Morningstar is of the opinion that the probability of either scenario occurring is low.

ENB guarantees the Senior Unsecured Notes of EEP and SEP. EEP and SEP guarantee the Senior Unsecured Notes of ENB.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020; https://www.dbrsmorningstar.com/research/370267), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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