Fitch Rates Enbridge Inc.'s Senior Unsecured Exchange Offering 'BBB+'

(The following statement was released by the rating agency) Fitch Ratings-New York-January 07: Fitch Ratings has assigned a 'BBB+' rating to Enbridge Inc.'s (ENB) exchange offering senior unsecured notes. A full list of rating actions is at the end of this release. ENB issued these notes in exchange for Enbridge Income Fund notes of the same financial terms. Enbridge Income Fund is an unincorporated open-ended trust established by a trust indenture under the laws of the Province of Alberta. ENB's ratings are primarily based on the company's low level of business risk. Approximately 98% of expected ENB cash flows will be from either regulated revenues or take-or-pay contract revenues. Moreover, the regulated revenues have strong commissions approving those revenues: the National Energy Board (NEB) and the Federal Energy Regulatory Commission (FERC). Concerns for Enbridge's credit quality are permitting risk and leverage that is elevated due to a plethora of multi-year construction programs. KEY RATING DRIVERS Beneficial Size: The ENB family's liquids pipeline system is the largest in the world. ENB's Mainline pipeline connects to Enbridge Energy Partners' (EEP) Lakehead pipeline at the Canadian/U.S. border. This integrated system in the second quarter of 2018 set a quarterly record, shipping approximately 2.64 million barrels per day. ENB, operating through two subsidiaries, is Canada's largest natural gas distribution provider, with 3.7 million customers. The company's gas transmission activity is growing rapidly in the United States. Supportive Regulatory Relationships: ENB's rating is primarily based on the quality of regulation relevant to the company's three core businesses: liquids pipelines, gas transmission and utilities. Approximately 98% of expected cash flows will be from either regulated or take-or-pay cash flows. ENB is one of the most stable and largest tariff-regulated pipeline companies in the Fitch midstream coverage. Regulation is of paramount importance to certain companies in the midstream industry. ENB's ratings are based on highly supportive supervision by, predominantly, Canada's NEB, and the U.S.'s FERC. A significant factor underlying ENB's rating is the NEB's long-term track record of furnishing regulatory support to the Canadian pipeline industry. NEB treatment of ENB has been positive. The Competitive Toll Settlement (CTS) approved by the NEB in 2011 has been a win-win for Enbridge and stakeholders. This win-win is clearly manifested by the unusual combination of a level tariff (the International Joint Tariff) and capex-driven record volumes (Mainline ex-Gretna and Lakehead volumes). New Project Execution Risk: ENB has a good track record of constructing pipelines on-budget. The permitting risk for pipeline construction has risen in the U.S. Getting to the construction stage has become more difficult for the industry, including ENB, in recent years, due to a variety of causes. ENB's largest project is the Mainline/Lakehead Line 3 Replacement project. The Line 3 Replacement project is budgeted for CAD9 billion, which represents approximately 40% of projects scheduled to come in service between Jan. 1, 2018 and Dec. 31, 2020. ENB expects the project to be completed in 2019. As of Sept. 30, 2018, approximately CAD4.4 billion of expenditures had been made. The Line 3 project is intended to accomplish the following goals: reliability, environmental-threat-minimization, safety, the restoration of approximately 370,000 bpd of capacity into Superior Wisconsin and the cost-effectiveness of the existing capacity. The project is complete in Wisconsin, and the 2017-phase in Canada was completed on budget. ENB plans to commence construction in Minnesota in first-quarter 2019. The state of Minnesota and the federal government will be required by ENB and EEP to issue construction-phase ministerial permits. Fitch expects the state and federal permitting part of the construction program will be challenging, given events across the U.S. as a whole. Leverage Expected to Fall in 2020: Fitch forecasts ENB's adjusted debt-to-EBITDA to be slightly above 5.0x in 2019. 2019 is a year of capex for the Line 3 Replacement project, in contrast to revenues from the project, which will commence after the in-service date, which ENB forecasts for the latter part of 2019. ENB has historically had high leverage relative to the sector. The NEB, which regulates ENB's foundational asset, the Mainline, has traditionally awarded rates based on an approximately 55/45 debt/equity structure, which is more levered than FERC's traditional award. Through the decades, the high actual Canadian leverage was matched by consistently strong regulatory treatment. This track record in large part drives ENB's credit quality. Lastly, Fitch judges favorably ENB's 2018 divestment agreements that harvested certain businesses with the goal of accelerating the pace of leverage reduction. Most of the sales have been consummated. One agreement that contemplated two related sales at different times has had the first part close, with the second targeted for first-half 2019. DERIVATION SUMMARY ENB, TransCanada Corporation (TRP; A-/Stable) and Kinder Morgan Inc. (NYSE:KMI; BBB-/Positive) are three large companies that have exposure to FERC. Additionally, all three from time to time develop multi-billion-dollar long-distance pipelines that take over a year to build (measured from ground-breaking to completion), and face intense permitting risk in the pre-construction phase. All three companies share in common expected 2018 leverage of approximately 5x, with TRP expected to post leverage below 5x. When comparing non-long-distance pipeline activities, KMI is viewed by Fitch as having more business risk than ENB (measured in the long term; e.g., KMI's CO2 division). TRP is a joint venture partner in an entity that operates North America's largest nuclear plant, which is part of its Energy segment. ENB has a large local gas distribution utility, a very low-risk business. Partly due to business risk, ENB is rated higher than KMI. When combining business risk and Fitch's ranking of each company's long-term history of financial policies, a two-notch rating separation is justified. Included in this notching is an offsetting factor, which is that KMI enacted in 2015, and maintains to the present time, a more conservative dividend policy than ENB. TRP is rated a notch higher than ENB due to a pre-2018 and recent track record of TRP having, in most years, materially lower leverage than ENB. It is acknowledged that, at the present time, TRP and ENB have similar leverage aspirations. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer --ENB's total liquids volumes maintain their rise at a slow rate, consistent with the Fitch price deck (e.g. 2019-2020 WTI of USD57.50 per barrel); --Continued steady implementation of the regulatory rulings and customer contracts underlying the large majority of ENB's revenue streams; --Execution of the approximately CAD22 billion capex plan for projects with scheduled in-service dates between 2018 and 2020; RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action For ENB, SEP and EEP Positive rating action is not anticipated in the medium-term time horizon, but adjusted leverage below 4.5x on a sustained basis could lead to a positive rating action. Developments That May, Individually or Collectively, Lead to Negative Rating Action For ENB, SEP and EEP --Leverage rising above 5.5x for a sustained period; --Line 3 Project experiences legal setbacks beyond Fitch's assumption for budget and timing, which reflects current industry conditions. LIQUIDITY Liquidity at Enbridge Inc. Is Adequate: As of Sept. 30, 2018, ENB had approximately CAD3.3 billion available out of CAD5.6 billion committed under its revolving credit facilities, in addition to an unrestricted cash balance of CAD643 million on its balance sheet. The family has approximately a combined CAD10.9 billion available out of CAD20 billion on their various revolving credit facilities. Some of the credit facilities in the family mature in the next 12 months, but generally these facilities are extendible on lenient terms. The combined liquidity is adequate to cover debt maturities in 2019. FULL LIST OF RATING ACTIONS Fitch has assigned a 'BBB+' rating to the following senior unsecured ENB notes: -- 4.1% Medium Term Notes (MTNs) due Feb. 22, 2019; -- 4.85% MTNs due Nov. 12, 2020; -- 4.85% MTNs due Feb. 22, 2022; -- 3.94% MTNs due Jan. 13, 2023; -- 3.95% MTNs due Nov. 19, 2024; -- 4.87% MTNs due Nov. 21, 2044. Contact: Primary Analyst Thomas Brownsword Senior Director +1 646-582-4881 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Peter Molica Senior Director +1 212-908-0288 Committee Chairperson John Kempf Senior Director +1 646-582-4881 Date of Relevant Rating Committee: Dec. 19, 2018 Summary of Financial Statement Adjustments: As per Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" sector-specific criteria, Fitch treats the relevant securities for ENB as 50% debt and 50% equity. Referenced leverage metrics are adjusted as follows: consolidated balances and flows are used; junior subordinated notes and preferred shares are given 50% debt credit, 50% equity credit; distributions from investees accounted for under the equity method of accounting are included in EBITDA; and equity earnings from these entities are excluded. Fitch looks at a variety of EBITDA calculations that drive the leverage result. Fitch considers EBITDA both inclusive and exclusive of flows related to non-controlling interests. Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018) https://www.fitchratings.com/site/re/10051058 Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) https://www.fitchratings.com/site/re/10036366 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10058809#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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