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

DBRS Limited (Morningstar DBRS) 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.

KEY CREDIT RATING CONSIDERATIONS
In March 2024, the Canadian Energy Regulator (CER) approved the negotiated settlement (the Settlement) with shippers for tolls on its Enbridge System/U.S. Lakehead Pipe Line System (Enbridge/Lakehead System or Mainline) filed by Enbridge Inc. (ENB; rated BBB (high), Under Review with Developing Implications by Morningstar DBRS and the 100% owner of EPI). The Settlement was approved as filed and covers both the Canadian portion of the Mainline and the Lakehead System over a 7.5-year term through 2028. Under the Settlement, the Mainline will continue to operate as a common carrier system and includes a financial performance collar that provides incentives for ENB to optimize throughput and cost, and also provides downside protection in the event of extreme supply or demand disruptions or unforeseen operating cost exposure.

The Enbridge/Lakehead System, the Canadian portion of which is owned by EPI, has consistently provided the most economic route for Western Canadian Sedimentary Basin producers shipping crude oil to the 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 91% of EPI's Morningstar DBRS-adjusted segment EBITDA in 2023. Morningstar DBRS notes that the lower toll under the Settlement will enhance the competitiveness of the Mainline.

Morningstar DBRS expects weaker EPI earnings and cash flow in 2024 compared with 2023, based on the nature of the tolls under the Settlement and the pace of ramp-up of the Government of Canada's (GOC; rated AAA with a Stable trend by Morningstar DBRS) Trans Mountain (TM) Pipeline Expansion Project (TMX) which began operations in Q2 2024. Nevertheless, Morningstar DBRS expects EPI's credit metrics to remain supportive of the current ratings.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely given the Company's relatively stable business and financial risk profiles. Although unlikely, the credit rating could be downgraded because of adverse regulatory changes or if EPI's credit metrics weaken substantially below Morningstar DBRS' expectations on a sustained basis.

EARNINGS OUTLOOK
Morningstar DBRS expects weaker earnings in 2024 as well, based on the nature of the toll settlement reached with Canadian Mainline shippers and the pace of ramp-up of TMX operations through 2024.

FINANCIAL OUTLOOK
Morningstar DBRS expects weaker cash flow in 2024, and potentially in 2025 as well, compared with 2023, based on the nature of the tolls under the Settlement. Nevertheless, Morningstar DBRS expects EPI's credit metrics to remain supportive of the current ratings.

CREDIT RATING RATIONALE
The credit rating actions reflect (1) the strong competitive position of the Mainline; (2) Morningstar DBRS' expectation that, under the Settlement, operating results will remain supportive of EPI's key credit metrics despite likely being reduced from very strong levels under the previously effective Competitive Tolling Settlement, while enhancing the Mainline's competitiveness through a lower toll for shippers than under the CTS; and (3) the mature nature of the Canadian Mainline operations, which results in very low capital expenditures requirements, and, thus, substantial financial flexibility.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of EPI, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of EPI, the following FRA factors listed in the Pipeline and Midstream Energy Industry are considered more important: cash flow-to-debt and EBIT interest coverage.

(C) Weighting of the BRA and the FRA
In the analysis of EPI, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431181

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

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

These are solicited ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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