01—Abstract
Summary
Summary of the 40-F filed February 15, 2013. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc. (ENB) reported 2012 results under U.S. GAAP (first year of U.S. GAAP reporting), with earnings attributable to common shareholders of C$610 milliona, or C$0.79 per share, down from C$820 million (C$1.09) in 2011.
The decline is driven largely by non-operating items: a C$537 millionb unrealized mark-to-market loss in Energy Services, a C$105 million after-tax impairment on Gulf of Mexico Offshore assets, and C$56 million of taxes on an intercompany gain. Management emphasizes adjusted earnings, which rose to C$1,249 million (C$1.62 per share) from C$1,100 million (C$1.46), a 11% increase, supported by Canadian Mainline performance under the Competitive Toll Settlement, new Seaway Pipeline service, and growth at Aux Sable and the Fund. Dividends were raised 12% to C$0.315 quarterly, a 70% payout of adjusted earnings for 2012.
Growth remains the central investment theme. Enbridge added about C$14 billionc of commercially secured projects in 2012, bringing its inventory to roughly C$27 billion, with in-service dates through 2016. Three market access programs (Gulf Coast, Eastern and Light Oil, totaling about C$14.7 billion) are designed to route Western Canadian and Bakken crude to U.S. Gulf Coast and eastern markets.
Financing was extensive: C$2.7 billiond of preference shares, C$400 million of common equity, and C$2.2 billion of medium-term notes were issued. The company reports a 61.4% debt-to-capitalization ratio and sustained investment-grade ratings (A- at S&P, Baa1 at Moody's, A(low) at DBRS). Key risks include pipeline leak liabilities from the EEP Line 6B release (estimated at US$820 million, before insurance), regulatory and toll challenges, cost and schedule risk on the project backlog, the pending Northern Gateway decision, and the write-down of the Cabin Gas Plant investment.
02—Key points
Key Highlights
- Adjusted earnings rose 14% to C$1,249 million (C$1.62 per share) in 2012, versus C$1,100 million (C$1.46) in 2011, while reported GAAP earnings to common shareholders fell to C$610 million (C$0.79) from C$820 million (C$1.09) due to unrealized derivative losses and impairments.
- Commercially secured growth project inventory reached approximately C$27 billion after adding about C$14 billion in 2012, with all projects expected in service between 2012 and 2016.
- Energy Services recorded a C$537 million unrealized derivative fair value loss, the largest single driver of the reported earnings decline, reflecting timing effects rather than realized cash losses.
- Quarterly dividend increased 12% to C$0.315 per common share, or C$1.26 annualized from March 2013, with a stated target payout of 60% to 70% of adjusted earnings.
- Liquids Pipelines adjusted earnings grew to C$684 million from C$536 million, driven by the Canadian Mainline under the 10-year Competitive Toll Settlement and the first year of Seaway Pipeline reversal service.
- Line 6B crude oil release liability was increased to US$820 million (C$137 million after tax attributable to Enbridge) before insurance recoveries, with US$505 million of insurance already recovered and US$145 million of coverage still expected.
- Preference share issuance of C$2.71 billion in 2012 and roughly C$2.2 billion of new medium-term notes strengthened liquidity, with available liquidity of C$10.8 billion at year end.
03—Questions
Frequently Asked Questions
Why did reported earnings fall in 2012 even though adjusted earnings grew?
Reported earnings to common shareholders fell to C$610 million from C$820 million mainly because of non-cash items that management excludes from adjusted earnings. These include a C$537 million unrealized mark-to-market loss in Energy Services, a C$105 million after-tax impairment on Gulf of Mexico Offshore assets, and C$56 million in taxes on an intercompany gain from asset transfers to the Fund. These items reverse over time, while operating earnings grew.
How large is the growth project backlog and what could it mean for future earnings?
Enbridge reports about C$27 billion of commercially secured projects expected in service between 2012 and 2016, including the C$5.8 billion Gulf Coast Access, C$2.7 billion Eastern Access and C$6.2 billion Light Oil Market Access programs. Management targets industry-leading adjusted EPS growth over this period. Execution risk is significant given the scale: cost overruns, regulatory delays and capacity constraints could reduce returns or push in-service dates.
What are the main risks to the dividend?
The dividend is set by the board and targets 60% to 70% of adjusted earnings; 2012 payout was 70%. Risks include the cash cost of the Line 6B release and any fines beyond the accrued amounts, the funding needs of a C$27 billion project backlog, and possible toll challenges on the Canadian Mainline and Southern Lights. Enbridge has no restrictions on paying dividends today, but preference share dividends must be paid before common dividends.
How is Enbridge funding its growth and how strong is its balance sheet?
Funding came from C$2.71 billion of preference shares, C$400 million of common equity, about C$2.2 billion of medium-term notes and cash from operations, which totaled C$2.87 billion in 2012. The debt-to-capitalization ratio improved to 61.4% from 65.6%. Ratings are investment grade: A- (S&P), Baa1 (Moody's), and A(low) (DBRS), all with stable outlooks. The company reports C$10.8 billion of available liquidity.
04—Continue