DBRS Confirms Enbridge Pipelines Inc. Ratings at “A” and R-1 (low), Stable Trend

DBRS has today confirmed the Issuer Rating of Enbridge Pipelines Inc. (EPI or the Company) at “A” and the ratings on EPI’s Medium-Term Notes & Unsecured Debentures and Commercial Paper at “A” and R-1 (low), respectively, all with Stable trends. The ratings reflect (1) results under the ten-year Competitive Tolling Settlement (CTS) effective on July 1, 2011, (2) pressure on the Company’s credit metrics during its current growth phase and (3) the strong competitive position of the Enbridge System/U.S. Lakehead Pipe Line System (Enbridge/Lakehead System), the Canadian portion of which is referred to as the Mainline. The Lakehead System is owned indirectly through EPI’s 20.6% interest in Enbridge Energy Partners, L.P.

The CTS provides for a joint tariff for volumes originating in Western Canada that are transported on the Lakehead System. Under the International Joint Tariff (IJT) agreement, any shortfall in toll revenues (e.g., as a result of lower throughput) under the CTS for the Lakehead System, as compared with its existing agreements, could potentially reduce the toll revenues available to the Mainline. Adjusted earnings rose by 6.5% in 2013 compared with 2012, largely due to 5.5% higher throughput, partly offset by a 14% drop in the Mainline IJT residual benchmark toll, due to a Lakehead System toll increase.

The Company’s credit metrics, while relatively strong, are under pressure during its medium-term growth phase. Free cash flow deficits will continue to require substantial funding, likely from a combination of external debt as well as debt and equity provided by its parent company, Enbridge Inc. (ENB), which is also directly involved in large-scale growth projects of its own that will require significant external funding.

EPI benefits from strong demand for Western Canada Sedimentary Basin (WCSB) crude oil in the U.S. Midwest (PADD II), supported by increasing crude oil production, rising pipeline throughput and its strong competitive position. Each of these factors contributes to earnings and cash flow stability. Further, Mainline expansions combined with ENB’s commercially secured intra-Alberta liquids pipelines projects (e.g., the recently completed Norealis Pipeline and the Athabasca Pipeline Twinning project expected to enter service in 2015) should support Mainline earnings growth by providing increasing volumes for delivery of WCSB crude oil to existing and, potentially, new markets. DBRS notes that these intra-Alberta projects are being funded at ENB subsidiaries other than EPI.

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

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 methodologies are DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and Rating Pipeline and Diversified Energy Companies, which can be found on our website under Methodologies.