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 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 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 Medium-Term Notes & Unsecured Debentures. 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 credit profile, supported by (1) completion of its strategic plan to reposition its asset mix to a pure regulated pipeline and utility business model demonstrated by disposal of non-core asset sales for approximately $8 billion with the proceeds used to support its secured growth projects (approximately $5.5 billion of secured capital remains to be funded through 2022) and balance sheet strengthening actions; (2) substantial progress on its large portfolio of low-risk capital projects ($9 billion of projects were placed into service during 2019); (3) an improved financial risk profile benefiting from ENB’s more conservative current funding plan compared with those in recent years; and (4) substantial liquidity (approximately $14 billion) 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 (capex) program.
DBRS Morningstar notes that ENB currently faces certain issues within its largest segment, Liquids Pipelines.
First, in late March 2020, volumes on the Enbridge/Lakehead System (30% 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 spread of the Coronavirus Disease (COVID-19) and the crude oil price war between Russia and OPEC. ENB has estimated that the 0.3 million barrels per day (b/d; 10%) decline in volumes over the last three quarters of 2020 under its base case scenario would equate to a $324 million (2%) decline in its projected 2020 EBITDA. ENB expects to mitigate this negative impact by reducing operating expenses by $0.3 billion and deferring $1 billion of 2020 capex into 2021, resulting in interest expense savings compared with initial guidance.
Second, 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 EEP’s U.S. L3R liquids pipeline project (connected to EPI’s Canadian portion) was originally anticipated in late 2017, but is now expected in the second half of 2021 (H2 2021). On June 3, 2020, the Minnesota Pollution Control Agency indicated that it will conduct a contested hearing regarding the draft 401 Water Quality Certificate permit, leading to further project delays in the State.
(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 b/d 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) expiring on June 30, 2021, which results in volume and operational risks through its fixed-toll methodology. If the negative effects on crude oil supply and demand related to the coronavirus pandemic and crude oil price war persist over a longer period of time than currently anticipated and/or if the successor agreement to CTS is less favourable to the Enbridge/Lakehead System’s competitive position (combined with placement into service of both major competing pipeline projects into service as early as 2023), such a scenario could potentially result in the Enbridge/Lakehead System becoming a “swing pipeline” in the event of stagnant industry volumes as shippers would be more likely to continue shipping on pipelines upon which they have made contractual take-or-pay commitments than pipelines without such commitments.
Commencement of construction of the L3R in Minnesota combined with maintenance of improved key credit metrics (including DBRS Morningstar-adjusted cash flow to debt of at least 15%; 14.4% at March 31, 2020) and satisfactory progress towards resolution of the Line 5 situation could lead to a Positive trend. Substantial completion of L3R construction combined with expected replacement of the CTS on a basis that maintains the Enbridge/Lakehead System’s strong competitive position could lead to an upgrade. A negative rating action is not expected over the medium term.
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.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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.
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