DBRS Morningstar Confirms Ratings of Enbridge Pipelines at "A"/R-1 (low) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Enbridge Pipelines Inc.’s (EPI or the Company) Issuer Rating and Senior Unsecured Notes rating at “A” and its Commercial Paper rating at R-1 (low), all with Stable trends.

The rating actions reflect (1) the strong competitive position of the Enbridge System/U.S. Lakehead Pipe Line System (Enbridge/Lakehead System), the Canadian portion of which (the Canadian Mainline) is owned by EPI; (2) strong results under the Competitive Tolling Settlement (CTS), despite temporarily reduced throughput between Q2 2020 and Q3 2021 that was mainly attributable to impacts from the Coronavirus Disease (COVID-19); and (3) the expected completion of a successor agreement to CTS on terms that maintain Enbridge/Lakehead System’s strong competitive position.

The Enbridge/Lakehead System has consistently provided the most economic route for Western Canadian Sedimentary Basin (WCSB) producers shipping crude oil to U.S. Midwest (PADD II)/Chicago and has transported about two thirds of Canadian crude oil exports into the U.S. The Canadian Mainline generated 94% of EPI’s DBRS Morningstar-adjusted segment EBITDA in 2021.

The CTS, which expired on June 30, 2021, but remains in effect on an interim basis, provides for a joint toll for volumes originating in Western Canada that are also transported on the U.S. Lakehead Pipe Line System (the Lakehead System). Under the International Joint Tariff (IJT) 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 Canadian Mainline.

Although mitigated by certain minimum-volume thresholds, the CTS could result in lower earnings and cash flow for EPI as direct owner of the Canadian Mainline in the event of material disruption in service availability on the Canadian Mainline, loss of significant volumes caused by lower-than-expected end-user demand, or higher shipments by competing pipelines or by rail. EPI, in consultation with its customers and other stakeholders, is exploring alternative rate-making options that may include (a) a modified CTS agreement; or (b) a COS rate-making structure. A new tolling framework is expected to be in effect by mid- to late 2023.

DBRS Morningstar expects EPI’s credit metrics to remain consistent with the current ratings as the Company continues to benefit from the placement into service of the Canadian portion of the Line 3 Replacement (L3R) Program by EPI on December 1, 2019, and the U.S. portion of L3R by Enbridge Energy Partners, L.P. (EEP; rated BBB (high) with a Stable trend by DBRS Morningstar) on October 1, 2021. Costs of the full L3R Program will be recovered through a 15-year toll surcharge mechanism.

Over the medium term, DBRS Morningstar believes that a positive rating action is unlikely. A negative rating action is also unlikely but could occur if approval of a new tolling agreement were to result in a negative impact on EPI's business risk profile and credit metrics. However, based on previously negotiated settlements, DBRS Morningstar does not expect this to be a material risk.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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