Oil storage tanks stand at an Enbridge storage terminal in Cushing, Okla., in March, 2015. Credit-rating agency Moody’s cut into Enbridge’s outlook this week in light of high debt levels, investment commitments and a complex capital structure.Daniel Acker/The Globe and Mail
Moody's Investors Service Inc. has downgraded Enbridge Inc.'s debt to one notch above junk status, saying the pipeline company's new plans to strengthen its finances will be slow to deliver results.
The agency cut its rating on Enbridge's senior unsecured debt to Baa3 from Baa2, which puts it at the bottom of investment-grade territory – an unusual position for a company operating in largely regulated businesses. Moody's changed its outlook for Enbridge to stable from negative.
The downgrade is a blow to Enbridge after chief executive officer Al Monaco announced a series of moves designed to reduce debt now that the company's $37-billion takeover of U.S.-based Spectra Energy is complete.
They include extensive asset sales and smaller annual increases in dividends while Enbridge moves forward with developing a planned $22-billion in new energy infrastructure projects.
"Our assessment of the plans is that the actions articulated are insufficient to improve the financial profile of the company in a timely manner to be in line with our previously stated expectations for a Baa2 rating," Moody's vice-president Gavin MacFarlane said in a statement.
It said Enbridge has the benefit of a large, stable and low-risk suite of assets that generates predictable cash flow. Offsetting it, however, are high debt, major capital-investment commitments and a complex capital structure.
Enbridge's shares had been under pressure as investors worried about the company's balance sheet in the wake of the Spectra deal. In late November, it issued $1.5-billion in new shares and announced plans to unload $3-billion of assets in 2018 while also tempering its dividend-growth plans, easing the market's worries.
Moody's, however, said the debt levels will not fall quickly enough for Enbridge to keep its previous credit rating, which covers $20-billion worth of securities. In total, Enbridge's long-term debt stood at $61.4-billion at the end of September.
It said Enbridge must achieve a debt-to-EBITDA (earnings before taxes, depreciation and amortization) ratio of 5.5 times for a sustained period to retain its previous rating.
"Moody's views the execution risks associated with Enbridge's stated actions to be sufficiently high that achieving those levels in 2018 would be challenging," it said.
Enbridge said it was disappointed by the downgrade, arguing it believed its plan had met Moody's criteria for maintaining its previous rating. It said it did not expect other agencies to follow suit and that it has no intention of making any changes to its new financial plan.
"We believe the plan provides prudent funding flexibility going forward and significantly de-levers the business and reduces financial risk. Note that this plan does not require any further follow on issuance of Enbridge Inc. common equity," investor relations director Jonathan Gould said in a note to analysts.
"We're advancing the other financing actions identified and committed to in the plan. We expect to continue to enjoy ready access to debt capital markets at Enbridge Inc. (and through its subsidiaries) on attractive terms and we have the flexibility to fund growth through many alternative means."
Jeffrey Jones