01—Abstract
Summary
Summary of the 40-F filed February 20, 2009. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc. (NYSE: ENB) filed its 2008 annual report on Form 40-F on February 20, 2009, incorporating its Annual Information Form, audited consolidated financial statements, and MD&A (all in Canadian dollars under Canadian GAAP).
Reported 2008 earnings applicable to common shareholders were C$1,320.8 milliona (C$3.67 per share), up sharply from C$700.2 million in 2007, but this was inflated by a one-time C$556.1 million after-tax gain on the sale of its 25% stake in CLH. Adjusted earnings, the figure management uses to set dividend policy, rose to C$677.3 million (C$1.88 per share) from C$636.5 million (C$1.79), a more representative measure of underlying growth of roughly 6%. The company is in a heavy capital investment cycle.
Additions to property, plant and equipment reached C$3.6 billionb in 2008 and management expects roughly C$3.7 billion of capital spending in 2009, with major liquids pipeline projects including Alberta Clipper, Southern Lights, Southern Access and Line 4 Extension. Total assets grew to C$24.7 billion and total debt to about C$11.6 billion, with the debt-to-capitalization ratio around 63% against a 60%-70% target range.
Management highlighted about C$6.5 billionc of committed credit facilities, a C$225 million increase in January 2009, and a plan to use the Dividend Reinvestment Plan to reduce cash needs. Key risks for investors include the commodity price decline and oil sands project deferrals that could slow future pipeline demand, the regulatory and tolling framework (including the incentive tolling settlement expiring in 2009), execution risk on large projects, the income-trust tax changes affecting Enbridge Income Fund from 2011, and credit ratings that sit in the lower investment-grade range (BBB/Baa3-area for preferred shares, A-/Baa1 for senior debt, with DBRS outlook negative).
02—Key points
Key Highlights
- Reported 2008 earnings of C$1,320.8M (C$3.67/share) were boosted by a C$556.1M after-tax gain on the CLH sale; adjusted earnings were C$677.3M (C$1.88/share), up about 6% from C$1.79 in 2007.
- Gas Distribution and Services (mainly Enbridge Gas Distribution) contributed about 88.5% of 2008 revenue and 22.8% of segment earnings, while Liquids Pipelines generated 24.8% of earnings on just 7.3% of revenue.
- Capital spending of about C$3.6B in 2008 is expected to reach about C$3.7B in 2009, funding major growth projects including Alberta Clipper (C$2.4B Canadian portion), Southern Lights, Southern Access and the Hardisty Terminal.
- The quarterly dividend was raised 12% to C$0.37 (C$1.48 annualized), with management targeting a 60%-70% payout of adjusted earnings; 2008 dividends paid equaled 70% of adjusted EPS.
- Total assets reached C$24.7B and debt rose to about C$11.6B; management reports a debt-to-capitalization ratio of 63.1% (excluding non-recourse debt) against a 60%-70% target range.
- Liquidity is supported by C$8.5B of total credit facilities (C$3.7B available at year-end) plus C$0.5B of short-term investments, with C$1.36B of non-recourse Southern Lights project financing.
- Credit ratings are investment grade but under some pressure: DBRS has a Negative outlook on the A-rated senior debt and Pfd-2 (low) preferreds, while Moody's Baa1 and S&P A- are stable.
03—Questions
Frequently Asked Questions
How did Enbridge's underlying profitability change in 2008 after excluding one-time items?
Adjusted earnings, which exclude non-operating and non-recurring items such as the CLH gain, rose to C$677.3 million (C$1.88 per share) from C$636.5 million (C$1.79 per share) in 2007. Growth came mainly from new Liquids Pipelines facilities (Waupisoo, Southern Access, Southern Lights AEDC), stronger Aux Sable and Energy Services results, and higher EEP distributions, partly offset by lost revenue from Hurricanes Gustav and Ike and the loss of CLH earnings after its sale.
What is driving Enbridge's capital spending and how will it be funded?
Growth projects including Alberta Clipper, Southern Lights, Southern Access, Line 4 Extension and Hardisty Terminal drove about C$3.6 billion of 2008 capex, with about C$3.7 billion expected in 2009. Management plans to fund this through operating cash flow (about C$1.4 billion in 2008), committed credit facilities, commercial paper, term note issuance, non-recourse project financing, dividend reinvestment and possible asset monetizations.
Is the dividend sustainable given the capital program and economic conditions?
Management raised the quarterly dividend 12% to C$0.37 despite the downturn and targets a 60%-70% payout of adjusted earnings, with 2009 expected near the midpoint. Dividends are supported by regulated, largely take-or-pay cash flows and the Dividend Reinvestment Plan, which reduced cash dividend outflows in 2008. Investors should note that common dividends paid in cash fell to C$359 million from C$435 million only because of that reinvestment, and sustained cash flow pressure from the capex program is a risk.
What are the main risks that could affect future pipeline volumes and earnings?
Key risks include lower crude oil prices causing oil sands producers to defer or cancel projects (reducing future mainline demand), competing pipelines such as Keystone and the Wood River line, regulatory changes to tolls (the incentive tolling settlement runs through 2009), execution and cost overrun risk on large projects, weather and hurricane exposure at Offshore, and the Alberta royalty changes effective 2009. Income trust tax legislation will also reduce cash distributions from Enbridge Income Fund from 2011.
How strong is Enbridge's balance sheet and credit profile?
Debt is largely fixed-rate and long-dated, with liquidity from about C$8.5 billion of credit facilities and a C$225 million increase in January 2009. The debt-to-capitalization ratio was 63.1% (excluding non-recourse debt), within the 60%-70% target. Credit ratings are investment grade (A-/Baa1 senior unsecured; BBB/Baa3 preferreds) but sit at the lower end, and DBRS maintained a Negative trend, so maintaining ratings while funding the capital program is an important consideration for investors.
04—Continue