DBRS Limited (DBRS Morningstar) placed all ratings on Enbridge Inc. (ENB or the Company) and Enbridge Energy Partners, L.P. Under Review with Developing Implications. The rating actions follow the announcement on September 5, 2023, that ENB has entered into definitive agreements (the Acquisition) with Dominion Energy, Inc. to acquire (1) East Ohio Gas Company (EOG); (2) Questar Gas Company (Questar Gas) and its related Wexpro companies (Wexpro, and collectively with Questar Gas, Questar); and (3) Public Service Company of North Carolina, Incorporated (PSNC) (collectively, the Local Distribution Companies (LDCs)) for a total purchase price of USD 14.0 billion ($18.9 billion—translated at USD/CAD 1.35), including the assumption of approximately USD 4.6 billion in debt. The rating actions reflect DBRS Morningstar’s view that the Acquisition should have a positive impact on ENB’s business risk profile, while the impact on the financial metrics at this time is uncertain since the financing plan has not been finalized.
DBRS Morningstar intends to resolve the Under Review with Developing Implications status once ENB's financing plan is finalized and key regulatory approvals have been secured. When finalized, should the financing plan result in minimal to no impact on the Company’s key credit metrics as they stood at the 12 months ended March 31, 2023 (please see DBRS Morningstar’s rating report on the Company dated June 28, 2023, for further details), DBRS Morningstar may consider a positive rating action.
After a review of the business risk profiles of the utilities assets planned to be acquired, DBRS Morningstar believes that the collective business risk profile of these assets is stronger than the weighted average of ENB’s current investment portfolio. Each LDC is state-regulated and operates under a cost-of-service framework with no exposure to natural gas price risk or volume risk. All three LDCs are allowed timely operating costs and capital expenditure recovery, subject to only modest regulatory lags. Combined, the LDCs provide natural gas distribution services to nearly 3.0 million customers with the strongest base of customers at EOG and Questar, which serve approximately 1.2 million customers each. EOG (rate base $6.0 billion in 2022) is a single-state LDC operating an extensive gas distribution system with more than 40 interconnections across nine interstate gas pipelines. EOG is anticipated to have potential for a substantial rate base increase driven by modernization efforts. Questar (rate base $3.9 billion in 2022) largely operates in Utah and has a one-of-a-kind agreement with Wexpro that provides up to 65% of Questar’s annual gas supply on a cost-of-service arrangement. PSNC (rate base $2.6 billion in 2022) is a single-state LDC in North Carolina. Both Questar and PSNC are experiencing growth primarily driven by population expansion within their respective service territories.
DBRS Morningstar believes this acquisition will significantly enhance ENB’s business risk profile for the following key reasons: First, DBRS Morningstar views the planned acquisition of the regulated gas utility businesses as providing a more stable source of cash flow generation with lower risk compared with ENB's existing business risk profile. The Acquisition is expected to double the contribution of ENB’s regulated gas distribution businesses to approximately 22% of total adjusted EBITDA (DBRS Morningstar estimate for 2024) from 13% currently.
Second, ENB will benefit from greater geographic and regulatory diversification with higher regulatory returns on equity and thicker deemed equity. However, these benefits could be partially or substantially offset by ENB’s final financing plan and the financing of capital expenditure programs for the utility businesses.
Finally, ENB will stand to potentially gain from synergies, as the Acquisition would form the largest natural gas distribution utility in North America, by volume, with a rate base exceeding $27 billion serving approximately 7 million customers in Canada and the U.S.
Notwithstanding the potentially positive impact to ENB’s business risk profile, the Under Review with Developing Implications designation accounts for some uncertainties associated with ENB’s financing plan. To finance the Acquisition, ENB has announced a $4.0 billion equity issuance through a bought deal with the banks, with the balance financed by a variety of sources including senior unsecured notes and hybrid debt securities, continuing the Company’s ongoing capital recycling program, at-the-market equity issuance program, and/or potentially reinstating its dividend reinvestment and share purchase plan. The exact amount of debt to be issued for the Acquisition remains uncertain at this time. Additionally, the Acquisition is contingent on obtaining regulatory approvals and, if obtained, the terms of the approvals. The Acquisition is expected to close in 2024.
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/416784 (July 4, 2023).
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)
-- Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616)
-- 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)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)
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.
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The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar 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.
This is a solicited credit rating.
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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