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.
The confirmations incorporate DBRS’s assessment of ENB’s strong business risk profile, which should benefit over the medium term from its strategic plan to reposition its asset mix to a pure regulated pipeline and utility business model (demonstrated by $7.5 billion of announced non-core asset sales to date) and completion of its current large portfolio of low-risk capital projects, combined with an improving financial risk profile that should benefit from ENB’s more conservative recent funding plan (including the expected $4.0 billion consolidated debt reduction), corporate simplification and the potential for reduced structural subordination at the ENB level over time. 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 improvement in key credit metrics with the completion of the current large capital expenditure (capex) program.
ENB’s low-risk, mostly regulated and/or contracted operations, comprising a diversified portfolio of investments, provide 96% of its cash flow and 100% of its credit exposure (excluding Enbridge Gas Distribution Inc. (rated “A” with a Stable trend by DBRS) and Union Gas Limited (rated “A” with a Stable trend by DBRS)) and are from customers that are either investment grade or that provide security. On a non-consolidated basis, ENB receives cash dividends from a variety of sources, supporting its ability to meet its direct debt and preferred share obligations. DBRS estimates that, based on last 12 months ending March 31, 2018, results, ENB’s consolidated cash flow (before extras) is 22% unencumbered (i.e., cash flow from entities with no external debt providing a stream of unencumbered dividends to ENB), 33% once-encumbered and 45% twice-encumbered.
ENB has a large portfolio of commercially secured projects under construction that are expected to come into service from 2018 to 2020. DBRS believes that the current capex plans, combined with the Company’s higher common dividend payout ratio following the merger with Spectra Energy Corp., will likely result in smaller free cash flow deficits than in 2017. As noted above, ENB’s current funding plan is more conservative than in prior years, likely resulting in a modestly positive impact on credit metrics (barring delays or cost overruns) before additional material improvement projected by 2020. While ENB has substantial availability on its consolidated credit facilities, it also has significant refinancing needs through YE2020.
A positive rating action is unlikely without substantial reduction in structural subordination. DBRS expects ENB to meet its key target metrics of 15% funds from operations-to-debt and five times debt-to-EBITDA, likely in late 2018 or early 2019. A negative rating action is not expected over the medium term.
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 and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.
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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.