01—Abstract
Summary
Summary of the 40-F filed February 23, 2011. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc. (NYSE/TSX: ENB) reported FY2010 earnings applicable to common shareholders of C$963 milliona, or C$2.60 per share, down from C$1,555 million (C$4.27) in 2009, as 2009 benefited from a C$329 million gain on the OCENSA sale and large unrealized derivative and foreign exchange gains that did not recur.
Adjusted earnings, a non-GAAP measure management uses for dividend targeting, rose 15% to C$984 millionb (C$2.66 per share) from C$855 million, driven by growth projects entering service, including the C$2.2 billion Canadian Alberta Clipper segment and the Southern Lights Pipeline, plus stronger Gas Distribution and Sponsored Investments results. Revenue rose to C$15.1 billion from C$12.5 billion, largely on higher commodity sales. The company placed C$6.5 billion of growth projects into service in 2010 and reports a further C$30 billion of opportunities under development, with about C$2.5 billion of capital spending planned for 2011.
Operating cash flow was C$1,851 millionc, which, together with financing, funded capital expenditures of C$2,357 million. Total debt rose and the debt-to-capitalization ratio (excluding non-recourse debt) increased to 65.0% from 63.6%, within a management target range of 60% to 70%. Ratings remain investment grade, with stable outlooks.
Key risks include a July 2010 Line 6B crude oil release and a September 2010 Line 6A release on Enbridge Energy Partners' Lakehead System, with estimated after-tax costs to Enbridge of about C$103 milliond charged in 2010 and potential additional costs and fines. Other risks include regulatory uncertainty over the Canadian mainline toll (the ITS was rolled forward a year), the pending Northern Gateway pipeline (estimated C$5.5 billion, in service late 2016 at the earliest), and a planned two-for-one stock split subject to shareholder approval on May 11, 2011. The dividend was raised 15% to C$0.49 per quarter, effective March 2011.
02—Key points
Key Highlights
- Reported earnings fell 38% to C$963 million (C$2.60/share), but this reflects non-recurring 2009 gains (OCENSA sale of C$329 million) and unrealized derivative and FX gains that did not repeat in 2010.
- Adjusted earnings rose 15% to C$984 million (C$2.66/share), supported by Alberta Clipper, Southern Lights, and Sarnia Solar entering service and by customer growth in Gas Distribution.
- Revenue increased 21% to C$15.1 billion, largely from higher commodity sales (C$12.0 billion), with transportation and other services up 14% to C$3.1 billion.
- Placed C$6.5 billion of growth projects into service in 2010 and has about C$6 billion of newly secured projects plus C$30 billion of opportunities under development.
- Line 6A and 6B crude releases on EEP's Lakehead System cost Enbridge about C$103 million in 2010 (before insurance recoveries, excluding fines and penalties), with additional costs and enforcement actions possible.
- Dividend increased 15% to C$0.49 per quarter (C$1.96 annualized) effective March 1, 2011; the 2011 payout ratio is expected near the upper end of the 60% to 70% target range.
- Debt-to-capitalization rose to 65.0% from 63.6%; ratings remain investment grade (DBRS A, Moody's Baa1, S&P A-) with stable outlooks.
03—Questions
Frequently Asked Questions
Why did reported earnings decline in 2010 if the business grew?
The 2009 results included a C$329 million gain on the sale of OCENSA, C$354 million in total investment disposal gains, and large unrealized derivative and intercompany foreign exchange gains (C$305 million in 2009 versus C$59 million in 2010). These non-recurring items did not repeat, so reported earnings fell to C$963 million even though adjusted earnings rose to C$984 million.
What is driving growth, and what is the outlook for 2011?
Growth is driven by projects in service in 2010, notably the Alberta Clipper pipeline (450,000 bpd initial capacity) and Southern Lights, along with Gas Distribution customer growth and green energy assets. Management expects 2011 capital spending of about C$2.5 billion on substantially secured projects, with major items including the Christina Lake Lateral, Edmonton Terminal expansion, Greenwich and Cedar Point wind projects, and Woodland Pipeline. It targets roughly 10% average annual EPS growth through the middle of the decade.
What are the main financial and regulatory risks?
Key risks include the Lakehead System crude releases and related litigation (about 20 actions filed in relation to Line 6B), regulatory uncertainty over the Canadian mainline toll structure and shipper challenges to Alberta Clipper tolls, rising leverage (debt-to-capitalization of 65.0%), and foreign exchange and interest rate exposure, which the company hedges substantially. Insurance coverage for the leaks is limited to about US$650 million aggregate pollution liability, with limited remaining coverage.
How secure is the dividend?
The company has increased its common dividend every year since its public listing in 1953 and targets a payout of 60% to 70% of adjusted earnings. In 2010 dividends paid were 64% of adjusted earnings per share. The 2011 dividend of C$1.96 annualized is expected to sit near the top of that range, leaving limited room for further increases without earnings growth.
What is the impact of the proposed two-for-one stock split?
The Board approved recommending a two-for-one split of common shares for shareholder vote at the May 11, 2011 annual meeting, with a record date of May 25, 2011 if approved and subject to regulatory approvals. The split does not change the company's underlying value or total market capitalization; it doubles the number of shares outstanding (from about 385 million) and halves the per-share amounts, including dividends and EPS.
04—Continue