01—Abstract
Summary
Summary of the 40-F filed March 17, 2005. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc.'s FY2004 Form 40-F (filed March 17, 2005) shows a company in growth mode: earnings applicable to common shareholders were C$645.3 milliona (C$3.86 per share) versus C$667.2 million (C$4.03) in 2003, a decline driven mainly by the absence of the 2003 gain on the sale of assets to Enbridge Income Fund.
Revenue rose 35% to C$6,540.5 millionb, largely because Gas Distribution and Services now includes 15 months of Enbridge Gas Distribution results following its change of year-end, which added about C$57.2 million of earnings. Operating income grew to C$1,083.5 million from C$891.4 million, and the 2004 results also include a C$97.8 million after-tax gain on the sale of AltaGas Income Trust. The balance sheet expanded to C$14.9 billion in total assets, driven by the C$754 million acquisition of the Enbridge Offshore System in the Gulf of Mexico, closed December 31, 2004.
Management has laid out a growth pipeline tied to Canadian oil sands, including interim agreements with Surmont and Long Lake shippers, a planned Athabasca expansion, and the proposed 390 km Waupisoo Pipeline. Debt to capitalization was 65.1%, and common dividends rose to C$1.83c per share, consistent with a stated target of 50-60% of adjusted operating earnings.
Key risks for investors include high leverage, the expiry of the Incentive Tolling Settlement on December 31, 2004 with new tolls still under negotiation, regulatory and rate-setting exposure at EGD, weather sensitivity in gas distribution, and the pending Spearhead reversal and related project costs. The filing also discloses ongoing litigation, including a late-payment penalty class action and a CAPLA landowner claim.
02—Key points
Key Highlights
- Revenue rose to C$6,540.5 million from C$4,855.3 million, reflecting a 15-month gas distribution consolidation after EGD's year-end change to December 31.
- Earnings applicable to common shareholders were C$645.3 million (C$3.86 per share), down from C$667.2 million (C$4.03) in 2003 because 2003 included a C$169.1 million gain on the sale of assets to Enbridge Income Fund.
- Operating income increased 22% to C$1,083.5 million, and the 2004 results include a C$97.8 million after-tax gain on the sale of the AltaGas Income Trust investment.
- Enbridge acquired the Gulf of Mexico Enbridge Offshore System from Shell for about C$754 million on December 31, 2004, bringing 11 pipelines carrying about 3 bcf/d.
- Oil sands growth pipeline includes interim agreements with Surmont and Long Lake shippers, a planned Athabasca expansion, and the proposed Waupisoo Pipeline with about 210,000 bpd initial capacity.
- Total assets reached C$14.9 billion and debt to capitalization was 65.1%, down from 66.3%, after C$350 million of preferred securities were redeemed in December 2004.
- Common dividends were C$1.83 per share, up from C$1.66, with a stated target payout of 50-60% of adjusted operating earnings.
03—Questions
Frequently Asked Questions
Why did earnings per share decline in 2004 even though revenue and operating income grew?
The 2003 results included a C$169.1 million after-tax gain on the sale of Alliance Pipeline Canada and Enbridge Pipelines (Saskatchewan) to Enbridge Income Fund. Excluding that one-time gain, earnings grew, helped by Terrace Phase III, EGD rate increases, and improved Aux Sable fractionation margins. The 2004 figures also include a one-time C$57.2 million benefit from the 15-month EGD consolidation and a C$97.8 million AltaGas gain, so underlying growth is less than the headline numbers suggest.
What is the impact of the change in EGD's fiscal year-end?
Enbridge Gas Distribution moved from a September 30 year-end on a one-quarter lag to a December 31 year-end. As a result, 2004 consolidated results include 15 months of EGD earnings, revenue, and capital spending. This added about C$57.2 million to earnings and inflated 2004 revenue. Going forward, the periods will be consistent, so comparisons should adjust for the extra quarter.
What are the main risks to the oil sands growth strategy?
The filing notes that the Incentive Tolling Settlement expired December 31, 2004, and new tolls are still being negotiated with CAPP, with current tolls charged on an interim basis. Growth depends on oil sands project financing and development, the price of natural gas used for steam, and crude prices. The interim shipper agreements were only partly finalized, and the Spearhead reversal has been delayed to 2006 after a US$10 million price reduction reflected weaker shipper support.
How leveraged is Enbridge, and what does the debt structure look like?
Debt to capitalization was 65.1% at year-end 2004, excluding joint venture non-recourse debt. Total debt carrying value was C$6,757.2 million, with C$530.2 million due within one year. Committed credit facilities total about C$2.2 billion at the corporate level. The company also has C$695.4 million of non-recourse joint venture debt and C$200 million of 7.8% preferred securities that can be redeemed after February 2007.
What legal and regulatory exposures should investors watch?
Key items include a Supreme Court of Canada decision requiring EGD to repay part of about C$74 million in late payment penalties, with the amount still to be determined; a C$55 million manufactured gas plant claim; the Bloor Street explosion charges, with fines of up to about C$5 million; and a CAPLA class action over pipeline right-of-way restrictions. Management says EGD expects to recover most costs through rates and that no provision is recorded for the CAPLA claim.
04—Continue