S&P Global Ratings has announced:
- On Sept. 5, 2023, Enbridge Inc. announced it entered into definitive agreements with Dominion Energy Inc. to acquire The East Ohio Gas Co. (EOG), Questar Gas Co., and Public Service Co. of North Carolina, Inc. (PSNC).
- The aggregate purchase price of approximately US$14 billion consists of US$9.4 billion in cash consideration and US$4.6 billion of assumed debt. The company has also announced a C$4 billion underwritten equity offering to fund part of the cash consideration.
- The acquisition creates North America’s largest natural gas utility platform and further enhances the company’s business risk profile. Based on our assumed funding plan, we forecast debt-to-EBITDA will be 4.9x in 2024.
- S&P Global Ratings revised its outlook on Enbridge to negative from stable and affirmed its ratings on the company, including its ‘BBB+’ issuer credit rating.
- The negative outlook reflects uncertainty about the nature and timing of the remainder of the financing plan and credit metrics, which leave limited cushion to the company’s downgrade trigger of at or above 5x debt to EBITDA.
S&P Global Ratings today took the rating actions listed above. We believe the addition of the regulated utilities enhances Enbridge’s business risk profile. The acquisition will increase the percentage of EBITDA from Enbridge’s regulated utilities to approximately 25%. Enbridge’s existing utility platform delivers service to about 15 million customers in Ontario and Quebec through 3.9 million residential, commercial, institutional, and industrial meter connections, and distributes more than 5.9 billion cubic feet per day of natural gas, based on 2022 figures. Combining EOG, Questar, and PSNC in this platform will add 3.0 million customers (EOG: 1.2 million; Questar: 1.2 million; PSNC: 600,000), totaling 6.9 million connections post transaction. These customers will be spread across five states and two provinces, further diversifying the company’s platform. We currently assess Enbridge’s business risk as excellent, based on the strong contractual framework that underpins the company’s liquids business and current regulated gas utility business. However, we believe the purchase of the utilities further strengthens its competitive positioning. Consequently, we have applied a positive comparable rating modifier.
Although we believe Enbridge has superior market access, funding plan execution risk remains in the short-to-medium term. The transaction consists of approximately US$14 billion that will be funded through cash consideration. Concurrent with its acquisition announcement, Enbridge also announced a C$4 billion underwritten equity offering. As a result, there is approximately US$6.5 billion to be funded before close in 2024. The company has indicated it will rely on a number of avenues to fund the remainder of the purchase price including noncore asset sales, hybrid capital, dividend reinvestment plan, at-the-market program, and debt. Although Enbridge has superior market access, given a significant portion of the cash consideration still requires funding, we believe that execution risk remains in the short-to-medium term.
Although historically we have considered financial metrics on a funds from operations (FFO)-to-debt basis, we believe that using debt to EBITDA to measure leverage better aligns the company with its peer group, which is primarily located in the U.S. and is evaluated on a debt-to-EBITDA basis. This is particularly the case, given the amount of revenue that Enbridge receives from its U.S. assets. Based on our assumed funding plan, we forecast debt to EBITDA will be 4.9x in 2024. Although the company has reiterated its commitment to debt to EBITDA of 4.5x-5.0x, a metric of 4.9x leaves limited cushion for Enbridge to execute its funding plan without relying on more than our assumed proportion of debt.
The negative outlook reflects the potential for weaker credit measures related to the acquisition of the three regulated gas distribution companies and a level of uncertainty related to the remaining financing plan for the acquisition. This uncertainty is related to potential receipt of proceeds from discrete noncore asset sales, the issuance of hybrid capital, the use of the at-the-market program, the dividend reinvestment plan, and incremental debt that will be used to fund the purchase price. We forecast pro forma debt to EBITDA will be about 4.9x, which provides limited cushion with respect to our target for the rating.
We could lower our rating on Enbridge if the company is unable to successfully raise additional funds through asset sales or other means such that adjusted debt to EBITDA is at or above 5x for a prolonged period.
We could revise the outlook to stable if the company is able to raise a substantial portion of the remainder of the capital to fund the acquisition and reduce debt to EBITDA closer to 4.75x during the next 12-18 months.
Environmental factors are a moderately negative consideration in our credit rating analysis of Enbridge. Climate transition factors into our assessment of all midstream companies. However, we note Enbridge has clearly articulated a strategy to lever its extensive asset portfolio to incorporate projects that address lowering its carbon footprint and longer-term energy transition. An example of this is the development of a solar farm adjacent to the Enbridge Ingleside Energy Centre that will produce the necessary power for the facility. These kinds of projects are available across the asset portfolio and include carbon capture and underground storage, renewable natural gas, offshore wind, and hydrogen. Social factors are also a moderately negative consideration, reflecting the ongoing opposition and ongoing litigation with respect to the company’s Line 5 crude oil pipeline.
DBRS has put the company on Review-Developing:
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.
Moody’s has gone to Outlook-Negative:
Moody’s Investors Service (Moody’s) has affirmed the Baa1 senior unsecured ratings of Enbridge Inc. (Enbridge) and its subsidiaries Enbridge Energy Partners, L.P. (EEP), Enbridge Energy Limited Partnership (EELP) and Spectra Energy Partners, LP (SEP). Moody’s also affirmed the A3 senior unsecured rating on Texas Eastern Transmission L.P. (TETCO) and the Prime -2 short term commercial paper rating on Enbridge (U.S.) Inc. In addition, Moody’s changed the outlooks for Enbridge, EEP, EELP, SEP and TETCO to negative from stable.
Affirmations:
…Issuer: Enbridge Inc.
…. Issuer Rating, Affirmed Baa1
….Backed Senior Unsecured Shelf, Affirmed (P)Baa1
….Subordinate Shelf, Affirmed (P)Baa3
….Preferred Shelf, Affirmed (P)Baa3
….Preferred Stock, Affirmed Baa3
….Preferred Stock, Affirmed (P) Baa3
….Subordinate Notes, Affirmed Baa3
….Senior Unsecured MTN Program, Affirmed (P)Baa1
….Backed Senior Unsecured Notes, Affirmed Baa1
….Senior Unsecured Notes, Affirmed Baa1
..Issuer: Enbridge (U.S.) Inc.
….Backed Senior Unsecured Commercial Paper, Affirmed P-2
..Issuer: Enbridge Energy Limited Partnership
….Senior Unsecured Notes, Affirmed Baa1
..Issuer: Enbridge Energy Partners, L.P.
…. Issuer Rating, Affirmed Baa1
….Senior Unsecured Notes, Affirmed Baa1
..Issuer: Spectra Energy Partners, LP
….Senior Unsecured Notes, Affirmed Baa1
..Issuer: Texas Eastern Transmission L.P.
….Senior Unsecured Notes, Affirmed A3
Outlook Actions:
..Issuer: Enbridge Inc.
….Outlook, Changed To Negative From Stable
..Issuer: Enbridge Energy Limited Partnership
….Outlook, Changed To Negative From Stable
..Issuer: Enbridge Energy Partners, L.P.
….Outlook, Changed To Negative From Stable
..Issuer: Spectra Energy Partners, LP
….Outlook, Changed To Negative From Stable
..Issuer: Texas Eastern Transmission L.P.
….Outlook, Changed To Negative From Stable
RATINGS RATIONALE
“The negative outlook on Enbridge is prompted by the company’s announcement that it would acquire US gas utilities for approximately USD14 billion, adding pressure to an already weak financial profile that we expect to persist following the transaction close,” said Gavin MacFarlane, Vice President – Senior Credit Officer. ” Although Enbridge’s business risk profile improves modestly with the transaction, it is not enough to offset ongoing pressure on the company’s financial profile.”
Today, Enbridge announced (1) that is has reached an agreement to acquire a portfolio of local gas distribution utilities from Dominion Energy, Inc. (Baa2 stable) for an enterprise value of USD14 billion, which includes an acquisition price of $9.4 billion and $4.6 billion of assumed debt. The utilities include The East Ohio Gas Company (A2 stable); Questar Corp, which includes Questar Gas Company (A3 negative); Wexpro (unrated) and the Public Service Company of North Carolina, Inc. (Baa1 stable). The company expects to close the acquisitions separately in 2024 following regulatory approvals.
The negative outlook reflects continued high leverage metrics, with proportionately consolidated debt to EBITDA forecast to remain around 5.5x (5.6x at 31 December 2022) for the foreseeable future, and low levels of financial flexibility highlighted by weak distribution coverage metrics (using depreciation) of 0.9x. The company’s low business risk profile improves with the acquisition of these utilities but not enough to change our overall business risk assessment of the company. With the close of these acquisitions, the gas utilities business will grow to about 22% of EBITDA from 12%. While diversification is improving with the acquisition, structural subordination is also increasing, although we do not expect to add a notch to Enbridge’s rating for this.
Enbridge has announced a CAD4 billion equity issuance in conjunction with the acquisition announcement. We expect the balance of the transactions to be financed with a mix of debt, hybrids, asset sales, and equity issuances which may include a combination of an at the market program or the activation of a dividend reinvestment program. The company has received debt financing commitments totaling $9.4 billion to improve liquidity in advance of closing the transactions.
The affirmation of Enbridge’s Baa1 rating reflects the company’s large size, scale and diverse, low risk asset base, all of which will be enhanced as a result of these acquisitions. Offsetting these strengths is ongoing high leverage and a sizable multiyear capital program. The company’s portfolio of assets will continue to generate stable cash flow based on a combination of rate regulation, a favorable contractual profile and a strong competitive position.
The ratings of subsidiaries SEP and EEP reflect the strength of the cross-guarantee that exists between each of them and Enbridge that causes the senior unsecured notes at these entities to have similar credit quality. EELP benefits from a guarantee from Enbridge that drives its credit profile. The credit profile of Enbridge (U.S.) Inc. reflects the liquidity support provided by Enbridge, which guarantees the commercial paper program. The ratings on Tetco have been affirmed based on the underlying strength of its business with the negative outlook reflecting our view that its rating is limited to one notch above that of Enbridge.
Rating Outlook
The negative outlook reflects the incremental pressure on the financial profile of the company as a result of the acquisition, given its already weak financial profile for the current Baa1 rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an Upgrade
- • An upgrade is unlikely given the negative outlook
- • The outlook could return to stable if we expect proportionately consolidated debt to EBITDA to be sustained comfortably below 5.5x and distribution coverage, using depreciation, to be above 1x
- • A further improvement in the company’s business risk profile
Factors that could lead to a Downgrade
- • Proportionately consolidated debt to EBITDA at or above 5.5x or distribution coverage, using depreciation, at or below 1x
- • Failure to successfully execute or material delays with regard to the capital raising and asset sales programs
- • A deterioration in the company’s business risk profile or an increase in structural subordination
The principal methodology used in rating Enbridge Inc., Enbridge (U.S.) Inc., Enbridge Energy Partners, L.P., Enbridge Energy Limited Partnership and Spectra Energy Partners, LP was Midstream Energy published in February 2022 and available at https://ratings.moodys.com/rmc-documents/379531. The principal methodology used in rating Texas Eastern Transmission L.P. was Natural Gas Pipelines published in July 2018 and available at https://ratings.moodys.com/rmc-documents/64961. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies
Affected issues are (… deep breath …):ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PF.K, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T, ENB.PR.Y.
