Why did Enbridge's earnings decline in 2005 despite higher revenues?

The 2004 results included a C$97.8 million after-tax gain from selling the AltaGas Income Trust investment and a 15-month period of gas distribution earnings from the change in EGD's fiscal year-end. Excluding these items, earnings were more comparable, with growth from Enbridge Offshore Pipelines, higher EGD earnings from rate base growth, and lower interest expense.

How much has Enbridge been paying in dividends and what is the new payout policy?

Common share dividends paid were C$1.04 per share in 2005, up from C$0.92 in 2004 on a split-adjusted basis. Starting in Q4 2005, Enbridge targets paying out approximately 60%-70% of earnings as dividends, up from the prior 50%-60% target, reflecting investor preference for income and a challenging acquisition market.

What are the largest growth projects and what risks do they carry?

The largest projects include the Gateway export and condensate import pipelines, Waupisoo, Southern Access, and Alberta Clipper. They depend on shipper commitments, regulatory approvals (NEB, AEUB, FERC, and others), environmental and Aboriginal consultation, and cost estimates that may change. Several competing projects by other companies could preclude some of these developments, and construction timing could slip.

How leveraged is Enbridge and how liquid is it?

The debt-to-capitalization ratio, excluding non-recourse debt, was 64.5% at December 31, 2005, slightly improved from 65.1%. Enbridge had C$3,454.8 million of available credit facilities at year-end, and management expects cash from operations plus capital market access to meet liquidity and capital expenditure needs. Current liabilities routinely exceed current assets, a pattern the company says is funded by operating cash flow.

What material legal or contingent exposures are disclosed?

Key items include an Ontario class action at Enbridge Gas Distribution over late payment penalties (approximately C$74 million billed in the relevant period, with a portion potentially refundable), charges related to the April 2003 Bloor Street explosion (maximum fine C$5.0 million), a CAPLA class action on pipeline crossing restrictions (no provision recorded), and an IRS challenge at Enbridge Energy Company that could reduce earnings by up to about US$60 million. Management believes none of these will have a material financial impact, though outcomes are uncertain.

ENBRIDGE INC 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 40-F filed March 7, 2006. Cited figures are marked; the original filing is the authoritative source.

Enbridge Inc. (NYSE/TSX: ENB) reported fiscal 2005 results in its Form 40-F, filed March 2006, showing total revenues of C$8,453.1 million^a (up from C$7,807.8 million in 2004) and earnings applicable to common shareholders of C$556.0 million, or C$1.65 per share (diluted C$1.63), versus C$645.3 million (C$1.93) in 2004.

The year-over-year decline is largely explained by the absence of the C$97.8 million^b after-tax gain on the 2004 sale of the AltaGas Income Trust investment, the 15-month results for gas distribution in 2004 that were not repeated, and lower interest expense that partly offset these headwinds. Operating earnings were supported by the newly acquired Enbridge Offshore Pipelines (contributing C$11.8 million despite hurricane disruptions), higher Gas Distribution earnings from customer growth, and consolidation of Enbridge Income Fund under new VIE rules beginning January 1, 2005. The company's strategic posture centers on a large organic growth pipeline, including the Gateway oil sands export and condensate import projects, Waupisoo, Southern Access Mainline expansion (with EEP), and the Alberta Clipper line, alongside a new 60%-70% dividend payout target adopted in Q4 2005.

Dividends paid on common shares rose to C$1.04^c per share in 2005 (after the two-for-one stock split in May 2005), and management targets organic growth averaging 6% over five years. Balance sheet leverage remained manageable, with a debt-to-capitalization ratio of 64.5% (including short-term borrowings, excluding non-recourse debt), and undrawn committed credit facilities of C$3,454.8 million supporting liquidity.

Investors should weigh the strong growth pipeline and the dividend increase against execution risk on multi-billion-dollar projects that remain subject to regulatory approval and shipper agreements, exposure to hurricane and weather events in the Gulf of Mexico and Ontario, and the company's reliance on regulated tolls and incentive settlements. The filing also discloses several contingencies, including the pending Supreme Court-directed late payment penalty repayment at EGD, the CAPLA class action, and an IRS challenge at Enbridge Energy Company with up to roughly US$60 million^d potential earnings impact.

02—Key points

Key Highlights

Fiscal 2005 earnings applicable to common shareholders were C$556.0 million (C$1.65 per share), down from C$645.3 million (C$1.93) in 2004, mainly due to the non-recurring 2004 AltaGas gain and 15-month gas distribution results in 2004.
Total revenues rose 8.3% to C$8,453.1 million, driven by Gas Distribution and Services (C$6,947.1 million) and the consolidation of Enbridge Income Fund starting in 2005.
Dividend payout target raised to 60%-70% of earnings starting Q4 2005; common dividends paid were C$1.04 per share in 2005 versus C$0.92 in 2004 (split-adjusted).
Major growth pipeline includes the Gateway condensate and petroleum export projects (about C$1.7B and C$2.5B stand-alone), Waupisoo Pipeline (about C$400M), Southern Access expansion (with EEP), and the proposed Alberta Clipper line (about US$1.6B initial capacity of 400,000 bpd).
Operating cash flow was C$903.5 million in 2005 versus C$886.7 million in 2004; total contractual obligations stand at about C$9.1 billion, of which C$6.7 billion is long-term debt.
Debt-to-capitalization ratio improved to 64.5% at year-end 2005 from 65.1% in 2004, with C$3,454.8 million of credit facilities available.
Acquisitions were modest in 2005 (C$88.6 million cash), including 65% of Olympic Pipe Line (US$99.8 million, closed February 1, 2006) and the final 10% of Spearhead Pipeline; the Spearhead reversal entered service in March 2006.

03—Questions

Frequently Asked Questions

Why did Enbridge's earnings decline in 2005 despite higher revenues?
The 2004 results included a C$97.8 million after-tax gain from selling the AltaGas Income Trust investment and a 15-month period of gas distribution earnings from the change in EGD's fiscal year-end. Excluding these items, earnings were more comparable, with growth from Enbridge Offshore Pipelines, higher EGD earnings from rate base growth, and lower interest expense.
How much has Enbridge been paying in dividends and what is the new payout policy?
Common share dividends paid were C$1.04 per share in 2005, up from C$0.92 in 2004 on a split-adjusted basis. Starting in Q4 2005, Enbridge targets paying out approximately 60%-70% of earnings as dividends, up from the prior 50%-60% target, reflecting investor preference for income and a challenging acquisition market.
What are the largest growth projects and what risks do they carry?
The largest projects include the Gateway export and condensate import pipelines, Waupisoo, Southern Access, and Alberta Clipper. They depend on shipper commitments, regulatory approvals (NEB, AEUB, FERC, and others), environmental and Aboriginal consultation, and cost estimates that may change. Several competing projects by other companies could preclude some of these developments, and construction timing could slip.
How leveraged is Enbridge and how liquid is it?
The debt-to-capitalization ratio, excluding non-recourse debt, was 64.5% at December 31, 2005, slightly improved from 65.1%. Enbridge had C$3,454.8 million of available credit facilities at year-end, and management expects cash from operations plus capital market access to meet liquidity and capital expenditure needs. Current liabilities routinely exceed current assets, a pattern the company says is funded by operating cash flow.
What material legal or contingent exposures are disclosed?
Key items include an Ontario class action at Enbridge Gas Distribution over late payment penalties (approximately C$74 million billed in the relevant period, with a portion potentially refundable), charges related to the April 2003 Bloor Street explosion (maximum fine C$5.0 million), a CAPLA class action on pipeline crossing restrictions (no provision recorded), and an IRS challenge at Enbridge Energy Company that could reduce earnings by up to about US$60 million. Management believes none of these will have a material financial impact, though outcomes are uncertain.

04—Continue

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