DBRS Limited (DBRS Morningstar) confirmed Enbridge Inc.'s (ENB or the Company) Issuer Rating and 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 are Stable. DBRS Morningstar also confirmed Enbridge Energy Partners, L.P.’s (EEP) Senior Unsecured Notes at BBB (high) with a Stable trend based on ENB’s guarantee; 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, 2022, approximately $8 billion remained to be funded on its $10 billion of projects through 2025), all of which are supported by regulatory and/or long-term contractual arrangements; (2) its relatively conservative financial risk profile in support of $5 billion to $6 billion of annual self-funded organic growth opportunities across the business segments in the post-2022 period; and (3) its significant liquidity (approximately $4.9 billion of consolidated availability as at March 31, 2022, from various credit facilities) 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 maintenance of key credit metrics near current levels.
DBRS Morningstar notes that ENB faces certain challenges within its largest segment, Liquids Pipelines (58% of DBRS Morningstar-adjusted segment EBITDA in the last 12 months (LTM) ended March 31, 2022).
First, tolls on the Enbridge/Lakehead System (the Mainline; 33% of ENB’s DBRS Morningstar-adjusted segment EBITDA in the LTM ended March 31, 2022) are currently determined under the 10-year Competitive Tolling Settlement (CTS), which expired on June 30, 2021, but remains in effect on an interim basis. ENB, 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 cost-of-service rate-making structure. Any negotiated settlement would require Canadian Energy Regulator approval before implementation. A new tolling framework is expected to be in effect by mid-to-late 2023. Approval of unfavourable terms could have a potentially negative impact on ENB's business risk profile and credit metrics. However, based on previously negotiated settlements going back to 1995, DBRS Morningstar does not expect this to be a material risk.
Second, ENB faces rising environmental, regulatory, and political risks with respect to construction of new, and continued operation of existing, pipelines in North America as highlighted by the following:
(A) The expected in-service date for EEP’s U.S. Line 3 Replacement liquids pipeline project was originally anticipated in late 2017, but, after various delays, was placed into service on October 1, 2021.
(B) 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 continues to operate the pipeline as the legal process proceeds.
Over the near to medium term, DBRS Morningstar expects (1) maintenance of key credit metrics, including consolidated cash flow-to-debt and equivalents of at least 15% (15.5% at March 31, 2022) going forward; and (2) replacement of the CTS on a basis that maintains the Mainline’s strong competitive position and favourable financial results. 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.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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@example.com.
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 firstname.lastname@example.org.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577