01—Abstract
Summary
Summary of the 40-F filed February 22, 2012. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc. (TSX/NYSE: ENB) reported fiscal 2011 results in its Form 40-F filed February 22, 2012, with earnings attributable to common shareholders of C$991 milliona (C$1.32 per share), up from C$963 million (C$1.30) in 2010.
Management emphasizes adjusted earnings, which exceeded C$1.0 billionb for the first time at C$1,110 million (C$1.48 per share, up 11%). Growth came from the Regional Oil Sands System, the Canadian Mainline under the new 10-year Competitive Toll Settlement (CTS), Aux Sable, Energy Services, and renewable power assets. Reported earnings were held back by roughly C$132 million of unrealized derivative and foreign exchange losses, a C$98 million non-recurring tax charge on an intercompany gain, and C$33 million of share costs for the Line 6A/6B crude oil releases, partly offset by C$50 million of insurance recoveries.
The balance sheet grew to C$34.3 billionc in total assets, and cash from operations rose to C$2.7 billion from C$1.85 billion. Enbridge spent C$2.5 billion on capex and closed the C$1.2 billion acquisition of a 50% interest in the Seaway Crude Pipeline, along with a 71% interest in the Cabin Gas Plant (about C$1.1 billion). The company reports approximately C$13 billion of commercially secured growth projects due in service between 2011 and 2015, plus a further C$35 billion of identified opportunities through 2020.
The dividend was raised 15% to C$0.2825d per quarter effective March 2012, and the company targets a 60–70% payout of adjusted earnings. For investors, the main risks are the unresolved liability from the Line 6B release (estimated at US$765 million, with a claim of about 25 lawsuits and insurance limits being exceeded), dependence on commodity and FX hedging, regulatory and toll challenges (including Southern Lights and Westspur), and execution risk on growth projects. The company also begins its transition to U.S. GAAP on January 1, 2012, and financial statements are reported in Canadian dollars.
02—Key points
Key Highlights
- Reported earnings attributable to common shareholders of C$991M (C$1.32/share) vs. C$963M (C$1.30) in 2010; diluted EPS C$1.30
- Adjusted earnings reached a record C$1,110M (C$1.48/share), up 11% year over year, the first time above C$1.0 billion
- Capital program: C$2.5B of 2011 capex, about C$3.7B planned for 2012, and roughly C$13B of commercially secured projects in service 2011–2015
- Dividend raised 15% to C$0.2825 quarterly (C$1.13 annualized) effective March 1, 2012; targeted payout of 60–70% of adjusted earnings
- Cash flow from operations rose to C$2,703M from C$1,851M; total assets were C$34.3B and shareholders' equity C$8.8B (Enbridge shareholders)
- Line 6B crude oil release estimate raised to US$765M (C$129M net to Enbridge); insurance limit of US$575M for the current year is likely to be exceeded
- Transitioning from Canadian GAAP to U.S. GAAP effective January 1, 2012, with EEP to be consolidated under U.S. GAAP
03—Questions
Frequently Asked Questions
Why did reported earnings differ materially from adjusted earnings in 2011?
Reported earnings of C$991M were C$119M below adjusted earnings of C$1,110M. The main drags were C$132M of net unrealized derivative and intercompany FX losses, a C$98M tax charge on an intercompany gain from the renewable asset transfer to the Fund, and C$33M of Enbridge's share of EEP's Line 6A/6B costs. These were partly offset by C$50M of Line 6B insurance recoveries and C$113M of unrealized gains in Energy Services.
What is the Competitive Toll Settlement (CTS) and why does it matter?
The CTS is a 10-year toll agreement with shippers on the Canadian Mainline, effective July 1, 2011 and approved by the NEB. It sets tolls in U.S. dollars, adjusted annually by 75% of Canada's GDP price index, and includes an International Joint Tariff. Earnings are now subject to throughput volume and cost variability, with some protection mechanisms. Enbridge also discontinued rate-regulated accounting for the mainline (excluding Lines 8 and 9) on that date.
What is the exposure from the Line 6B crude oil release?
EEP (23% owned by Enbridge) estimates total costs of US$765M before insurance and excluding fines, up from US$550M a year earlier. Enbridge's after-tax share is about C$129M. Approximately 25 lawsuits have been filed, and the State of Illinois has filed a claim related to Line 6A. No fines or penalties had been assessed as of year-end. Insurance covered US$335M in 2011, but the policy limit was expected to be exceeded, and fines are not covered.
How is Enbridge funding its growth program and what are its credit metrics?
Enbridge funds growth through operating cash flow, commercial paper, term notes, credit facilities, and equity. In 2011 it issued C$926M of Series B and D preferred shares and monetized renewable assets to the Fund for about C$210M of cash. Total committed credit facilities were C$7.17B, with C$3.68B drawn or backing commercial paper. The debt-to-capitalization ratio (excluding non-recourse debt) fell to 63.2% from 65.1%. Ratings are investment grade: A(low) at DBRS, Baa1 at Moody's, and A- at S&P.
What are the main risks flagged for investors?
Key risks include: (1) Line 6B liability and litigation beyond insurance coverage; (2) market-price exposure, with 2011 EaR at about 2.5% of forecast earnings and hedging over 85% of forecast adjusted earnings through 2016 at about C$1.05/US$; (3) regulatory challenges to tolls on Southern Lights (with an FERC decision expected by June 2012) and the Westspur tolls; (4) execution and cost risk on approximately C$13B of projects, including Northern Gateway (estimated at C$5.5B, earliest in-service 2017); and (5) the transition to U.S. GAAP, which will change how EEP and joint ventures are presented.
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