ENB Finalizes Dropdown; S&P Downgrades To P-2(low); DBRS Review-Negative

Enbridge Inc. has announced:

  • •$30.4 billion transfer of the Canadian Mainline, the Regional Oil Sands System and Canadian renewable energy assets to Enbridge Income Fund
  • •Transaction supports higher dividend payout and positions Enbridge to extend its industry leading growth rate beyond 2018
  • •Available Cash Flow from Operations growth expected to average approximately 18 percent from 2014 to 2018
  • •33 percent dividend per share growth in 2015, as previously announced
  • •14 to 16 percent expected annual average dividend per share growth from 2016 to 2018
  • •Transformation of Enbridge Income Fund Holdings to a premier Liquids Pipelines investment vehicle in Canada
  • •Enbridge to remain as manager and operator of transferred assets

Enbridge Inc. (TSX:ENB) (NYSE:ENB) (Enbridge or the Company) has reached agreement with Enbridge Income Fund (the Fund) to transfer its Canadian Liquids Pipelines Business, held by Enbridge Pipelines Inc. (EPI) and Enbridge Pipelines Athabasca Inc. (EPA), and certain Canadian renewable energy assets to the Fund for consideration payable at closing valued at $30.4 billion (the Transaction). The Transaction is subject to customary regulatory approvals and closing conditions, as well as a vote of the public shareholders of Enbridge Income Fund Holdings Inc. (TSX: ENF) (ENF), which is expected to occur in August 2015.

The Transaction is a key component of Enbridge’s Financial Strategy Optimization introduced in December of last year which included an increase in the Company’s targeted dividend payout. It advances the Company’s sponsored vehicle strategy and supports Enbridge’s previously announced 33 percent dividend increase in 2015 and expected annual average dividend per share (DPS) growth of 14 to 16 percent from 2016 through to 2018. It also positions Enbridge to extend its industry leading DPS growth beyond 2018. The Transaction is expected to provide Enbridge with an alternate source of funding for its enterprise wide growth initiatives and enhance its competitiveness for new organic growth opportunities and asset acquisitions.

The transaction (often referred to as the dropdown), and its resultant rating agency unhappiness with the company, was discussed on PrefBlog in December, 2014. Now it has advanced a step and the first thing that happened was a downgrade from S&P:

  • •We are lowering our ratings on Calgary, Alta.-based Enbridge Inc. (EI), Enbridge Pipelines Inc. (EPI), and Toronto-based Enbridge Gas Distribution Inc. (EGD), including our long-term corporate credit rating on each to ‘BBB+’ from ‘A-‘.
  • •We are also lowering our corporate credit rating on Houston-based Enbridge Energy Partners L.P. (EEP) to ‘BBB’ from ‘BBB+’.
  • •We are removing the ratings from CreditWatch, where they were placed Dec. 4, 2014.
  • •The downgrade reflects our assessment of weak forecast financial metrics at EI.
  • •The announced dropdown transaction of assets to Enbridge Income Fund (EIF) does not change our assessment of business or financial risk profiles at EI, nor does it introduce a sufficient level of subordination to further lower EI debt ratings.
  • •We assess EGD and EPI to be “core” and EEP to be “highly strategic” to EI.

We view Enbridge’s financial risk profile as “aggressive.” The continuing large capital program to expand existing and build new liquids pipelines will continue to pressure financial metrics for the next several years. We forecast adjusted funds from operations (AFFO)-to-debt of 10%-13% under our forecast capital expenditures and financing plans over the next two years. The lower financial risk profile reflects our expectation of lower consolidated funds from operations (FFO)-to-debt ratios that are in the aggressive financial risk profile category using the medial cash flow volatility table. The company has brought large-scale capital projects in service on time and on budget, and we expect this to continue. Financial policy has generally been credit-supportive, although growing capital expenditures from new projects, and the parents support of subsidiary companies with internal equity financing, have shifted to what we believe is a more neutral stance.

A downgrade could occur if AFFO-to-debt stays below 11%, which could result from weaker financial performance, due to mainline volumes falling below expectations, or a more aggressive funding of the large capital program throughout our outlook period.

Maintaining AFFO-to-debt above 15% could result in an upgrade by revising the financial risk profile to “significant” from aggressive.

DBRS was more restrained, changing the status of the Review to Negative from Developing:

DBRS Limited (DBRS) has today changed the status of the following ratings of Enbridge Inc. (ENB) to Under Review with Negative Implications from Under Review with Developing Implications, where they were placed on December 3, 2014:
— Enbridge Inc., Issuer Rating of A (low)
— Enbridge Inc., Medium-Term Notes & Unsecured Debentures rated A (low)
— Enbridge Inc., Cumulative Redeemable Preferred Shares rated Pfd-2 (low)
— Enbridge Inc., Commercial Paper rated R-1 (low)

DBRS expects the combination of the Transaction and the Plan to have a negative impact on ENB’s credit risk profile mainly due to the following factors:

(1) Following completion of the Transaction and the Plan, holders of ENB’s direct external debt would be further away from the cash flow of the assets transferred to EIF (the Transferred Assets). Dividends from the Transferred Assets would be needed to service EIF debt prior to the payment of common dividends to EIFH’s public shareholders and payment of preferred and common share dividends to ENB, the latter of which would be available to meet the obligations to ENB’s external debt and preferred shareholders. Conversely, as part of the Plan, ENB’s direct external debt holders would be closer to EEP’s assets, which would be owned directly by ENB (through EECI) rather than through EPI (and then EECI) following completion of the Plan. For context, however, the Transferred Assets accounted for more than 40% of ENB’s 2014 segment earnings compared with 12% for EEP.

(2) The initial 33% increase in ENB’s common share dividend and its move to a higher dividend payout ratio range (75% to 85% of adjusted earnings, converting to 40% to 50% of available cash flow from operations), combined with the impacts of the Transaction and the Plan, would result in higher consolidated ENB funding needs. Consequently, ENB would be relying more heavily on dividends from (and external funding at) its directly encumbered subsidiaries (including EIF) to finance the direct-to-ENB portion (including its joint ventures with EEP) of the substantial consolidated growth capital expenditure (capex) program over the 2015 to 2018 period. This factor would be at least partly offset by the offloading of at least part of the direct-to-ENB funding needs to EIF. DBRS’s ENB ratings incorporate expected improvement in ENB’s credit metrics on both fully and modified consolidated bases as longer-dated organic growth projects come on-stream and begin to generate cash flow in the later years of its five-year growth capex program.

Based on its review to date, DBRS expects to downgrade all of ENB’s ratings by one notch, with Stable trends, upon completion of the Transaction; therefore, DBRS believes that Under Review with Negative Implications is the appropriate rating action at this time.

Moody’s had nothing to say but the Outlook remains Negative.


7 Responses to “ENB Finalizes Dropdown; S&P Downgrades To P-2(low); DBRS Review-Negative”

  1. jiHymas says:

    Thank you! I have dedicated a post to this.

  2. FletcherLynd says:


    Do you know if this rating (or the DBRS one for that matter) applies to the USD listed issues: ENB.PR.U, ENB.PF., ENB.PR.V, ENB.PR.V?

    I have been collecting these slowly and like the thought of the USG 5yr (which is 1.75% today) and the range of +282 to +315 reset rates which will apply at varying dates over the next two to four years. Especially when bought as a discount around $20.

    But I am wondering what the rating agencies (and yourself more so) think about these…

  3. hrseymour says:

    Yes, Moodys downgraded all of ENB preferreds to BB+:


    I am also investing in ENB (as well as AX and ALA) US$ preferreds which seem greatly undervalued vs their CA$ brethren.

  4. prefQC says:

    Are the dividends of these $US issues eligible for the dividend tax credit in Canada?

  5. jiHymas says:

    hrseymour, thanks for the assistance!

    Yes, the dividends of the USD issues are eligible for the dividend tax credit. For example, the Prospectus for ENB.PR.U (SEDAR, Enbridge Inc. Apr 12 2012 20:38:58 ET Prospectus supplement – English PDF 215 K; if I link I’ll get thrown in the clink):

    Dividends (including deemed dividends) received (or deemed to be received) on the Series J Shares or the SeriesKShares, as the case may be, by an individual (other than certain trusts) will be included in the individual’s income and will be subject to the gross-up and dividend tax credit rules normally applicable to taxable dividends received from taxable Canadian corporations. Individuals are entitled to an enhanced gross-up and dividend tax credit in respect of “eligible dividends” received from taxable Canadian corporations, such as the Corporation, if such dividends have been designated as eligible dividends by the Corporation at or before the time of payment. By notice in writing on the Corporation’s website, the Corporation has designated all dividends paid by the Corporation to be “eligible dividends” within the meaning of the Tax Act unless otherwise notified.

    … and the Enbridge website:

    Tax Treatment

    Canadian Shareholders

    Unless otherwise indicated, common and preferred share dividends paid by Enbridge Inc. (ENB), either in Cdn or US dollars, will be designated as “eligible dividends” for Canadian income tax purposes except as described below*. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend credit.

    Canadian beneficial shareholders who received dividends outside of an RRSP, RRIF or DPSP should receive a T5 Supplementary slip from their brokerage firm or intermediary. Canadian registered shareholders will receive a T5 Supplementary slip from Canadian Stock Transfer Company (CST). The deadline for issuance of T5 Supplementary slips is on or before the last day of February following the calendar year to which the information applies. Please refer questions regarding the T5 slips directly to your brokerage firm or CST. If you have any questions regarding the taxation of eligible dividends, please contact your Canadian tax advisor or your local office of the Canada Revenue Agency.

    They do list two exceptions to this general rule in recent years, both applicable to common shares only.

  6. prefQC says:


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