DBRS Morningstar Confirms Enbridge Pipelines Inc. at “A”/R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Enbridge Pipelines Inc.’s (EPI or the Company) Issuer Rating and Medium-Term Notes & Unsecured Debentures rating at “A” and its Commercial Paper rating at R-1 (low), all with Stable trends. The rating actions reflect (1) the strong competitive position of the Enbridge System/U.S. Lakehead Pipe Line System (Enbridge/Lakehead System), the Canadian portion of which (the Canadian Mainline) is owned by EPI; (2) strong results under the Competitive Tolling Settlement (CTS), despite throughput declines during 2020 that were mainly attributable to impacts from the Coronavirus Disease (COVID-19); and (3) the expected completion of a successor agreement to CTS on terms that maintain Enbridge/Lakehead System’s strong competitive position.

The Enbridge/Lakehead System has consistently provided the most economic route for Western Canadian Sedimentary Basin producers shipping crude oil to U.S. Midwest (PADD II)/Chicago and has transported about two-thirds of Canadian crude oil exports into the U.S. The Canadian Mainline generated 92% of EPI’s DBRS Morningstar-adjusted segment EBITDA in the last 12 months ended March 31, 2021.

The CTS provides for a joint toll for volumes originating in Western Canada that are also transported on the U.S. Lakehead Pipe Line System (the Lakehead System). Under the International Joint Tariff agreement, joint tolls are allocated based on the existing Lakehead System rate structures; therefore, any shortfall in tolls (e.g., caused by lower throughput) under the CTS could reduce tolls for the Canadian Mainline. While the coronavirus pandemic resulted in declines in Canadian Mainline throughput in Q2 2020 through Q4 2020 relative to the year-earlier quarters, the negative impact was temporary as throughput in Q1 2021 was only 3.4% below that of Q1 2020, which was a record quarter for volumes.

Although mitigated by certain minimum-volume thresholds, the CTS could result in lower earnings and cash flow for EPI as direct owner of the Canadian Mainline in the event of material disruption in service availability on the Canadian Mainline, loss of significant volumes caused by lower-than-expected end-user demand (as experienced during the coronavirus pandemic), or higher shipments by competing pipelines or by rail. DBRS Morningstar notes that EPI is currently in the regulatory process for a new Enbridge/Lakehead System contractual tolling arrangement to replace the CTS, which expired on June 30, 2021, although it was since extended on an interim basis that would, if approved, reduce EPI’s exposure to volume risk.

DBRS Morningstar expects EPI’s credit metrics to remain consistent with the current ratings as the Company benefits from placement of the Canadian portion of the Line 3 Replacement (L3R) Program into service on December 1, 2019, and awaits completion of the U.S. portion of L3R by Enbridge Energy Partners, L.P. (rated BBB (high) with a Stable trend by DBRS Morningstar). Costs of the full L3R Program will be recovered through a 15-year toll surcharge mechanism under the CTS. Canadian Mainline’s average toll in U.S.-dollar terms currently benefits from the temporary surcharge added to the Canadian portion of the toll on December 1, 2019, and will benefit from the permanent toll increase once the U.S. L3R is placed into service, likely in Q4 2021.

Over the medium term, DBRS Morningstar believes that a positive rating action is unlikely. A negative rating action is also unlikely, but could occur over the medium term if EPI’s credit metrics weaken substantially below current levels on a sustained basis.

ESG Considerations
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/373262.

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

The principal methodologies are Rating Companies in the Pipeline and Diversified Energy Industry (https://www.dbrsmorningstar.com/research/370267; November 19, 2020) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (https://www.dbrsmorningstar.com/research/375001; March 9, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 the report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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