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 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 its (1) 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, 2023, approximately $15 billion remained to be funded on its $17 billion of projects through 2025), all of which are supported by regulatory and/or long-term contractual arrangements; (2) relatively conservative financial risk profile in support of approximately $6 billion of annual self-funded organic growth opportunities across the business segments in the post-2022 period; and (3) significant liquidity (approximately $11.1 billion of consolidated availability as at March 31, 2023, 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 challenges within its largest segment, Liquids Pipelines (58% of DBRS Morningstar-adjusted segment EBITDA in the last 12 months (LTM) ended March 31, 2023).
First, tolls on the Enbridge/Lakehead System (the Mainline; 33% of ENB’s DBRS Morningstar-adjusted segment EBITDA in the LTM ended March 31, 2023) 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. On May 4, 2023, ENB announced that it had reached an agreement in principle on a negotiated settlement (the Settlement) with shippers for incentive tolls on the Mainline. The Settlement covers both the Canadian Mainline and the Lakehead System over a 7.5-year term through 2028 and preserves many of the features of the CTS. DBRS Morningstar estimates that, had the Settlement been in effect in 2022, the Hardisty to Chicago Heavy Barrel Toll would have been approximately 14% lower than it was under the CTS (USD 5.40 per barrel), with the Canadian Mainline bearing the brunt of the toll reduction. Consequently, DBRS Morningstar expects weaker Canadian Mainline earnings in 2024 as well, based on the nature of the toll settlement reached with Canadian Mainline shippers and the pace of the ramp-up of the Government of Canada’s (rated AAA with a Stable trend by DBRS Morningstar) Trans Mountain Pipeline Expansion Project (TMX) operations through 2024 before a potential partial recovery in 2025. However, the impact on the full Mainline is expected to be more modest. DBRS Morningstar also notes that the lower toll under the Settlement will enhance the competitiveness of the Mainline.
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 Mainline. ENB continues to operate the pipeline as the legal process proceeds. In March 2023, the U.S. Army Corp of Engineers extended the federal permitting process for construction of a tunnel under the Straits of Mackinac to 2026.
DBRS Morningstar could consider positive rating actions on all of ENB’s and EEP’s ratings over the medium term if the following items occur: (1) maintenance of key credit metrics, including consolidated cash flow-to-debt and equivalents of at least 15% (14.7% at March 31, 2023) going forward; (2) successful resolution of the Line 5 dispute; and (3) confirmation of the Mainline’s continued strong competitive position and favourable financial results under the Settlement and in light of upcoming competition from TMX starting in Q1 2024. 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE 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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2022; https://www.dbrsmorningstar.com/research/404917)
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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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.
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