DBRS Confirms Enbridge Income Fund at BBB (high), Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Long-Term Notes of Enbridge Income Fund (the Fund or the Company) at BBB (high) with Stable trends. The confirmation reflects (1) the improvement of the Fund’s business risk profile following the completion of the Bakken Expansion, and (2) cash flow and interest coverage metrics are strong for current rating range.

The Fund’s business risk profile is reflective of a BBB (high) rating due to the following factors: (1) The Fund owns a 50% interest in Alliance Canada (Alliance: rated A (low), which has consistently generated stable cash flow to service debt obligations at the Fund level. The concern about Alliance is the uncertainty with respect to the renewal of its shipper contracts, with a bulk of contracts expiring on December 1, 2015. (2) The Fund owns and operates a system of pipelines (the Saskatchewan Systems and the Canadian portion of the Bakken Expansion) and 11 million barrels in terminal and storage capacity. The Bakken Expansion and terminal and storage assets are under long-term take-or-pay contracts, providing stable cash flow, whereas the Saskatchewan Systems are either under cost-of-service (COS) or market-based methodology. The main risk facing this segment is the exposure to volume risk of the market-based Weyburn and Virden systems, and to a lesser extent Westspur where pre-determined toll contracts ratchets act to roughly mimic cost of service models to protect from inter-year volume declines. (3) Following the 2011 and 2012 acquisitions, the Fund owns a portfolio of over 500 megawatts of generation capacity, mostly renewables. Substantially all capacity is under long-term contracts with strong credit counterparties, mitigating power price risk. The concern about this segment is generation volume risk due to unpredictable weather. Following the completion of the Bakken Expansion in Q1 2013, earnings contributions from stable liquids and storage assets improved, accounting for 54% of the Fund’s consolidated earnings (50% in 2012). However, should the Fund expand materially into higher risk assets than the average risk of the current portfolio, a negative rating action could follow.

The Fund’s credit metrics reflect the A (low) rating range with the exception of the debt leverage. DBRS notes that on an adjusted basis, the debt leverage improved in 2013 to 50% from 57% in 2012. However, given the Fund’s exposure to the higher-risk generation assets, this ratio is considered modestly high for the current rating. The Fund’s strategy is to use 50% debt/50% equity in financing its future capital expenditures and expansion. Should the debt leverage materially increase from the current level, DBRS could take a negative rating action given the Fund’s current asset mix.

Notes:
All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Pipeline and Diversified Energy Companies (January 2014), which can be found on our website under Methodologies.