Why did GAAP earnings fall while adjusted earnings grew?

GAAP earnings attributable to common shareholders declined to $446 million ($0.55 per share) from $602 million ($0.78) mainly because of unrealized mark-to-market losses on derivatives, which are non-cash and reverse over time as contracts settle. Management's adjusted earnings exclude these items and other unusual or non-operating factors, and rose to $1,434 million ($1.78 per share). Investors should note that adjusted earnings are a non-GAAP measure that is not standardized and may not be comparable to other issuers' figures.

How secure is the dividend, and what is the payout ratio?

The Board declared a quarterly common dividend of $0.35 per share ($1.40 annualized) effective March 1, 2014, an 11% increase. In 2013 the dividend payout was 71% of adjusted earnings per share, slightly above the company's long-term target range of 60% to 70%. Dividends are at the Board's discretion, and no contractual restrictions currently prevent payment. Continued growth depends on sustained cash flow from completed projects and successful funding of the growth program.

What are the largest financial and regulatory risks to the growth plan?

The filing highlights several: (1) Line 6B crude oil release costs of US$1,122 million, which exceed the insurance policy limit, so further costs are not covered; (2) Northern Gateway, which faces five judicial review applications and a Governor in Council decision expected in June 2014, with its cost estimate expected to rise significantly; (3) project execution risk across roughly 44 projects, including cost escalation and in-service delays; and (4) reliance on capital markets and bank facilities to fund approximately $8 billion of annual capex. Foreign exchange, interest rate and commodity exposures are managed through hedging, but unrealized derivative fluctuations continue to create earnings volatility.

How strong is the balance sheet and liquidity position?

At December 31, 2013, total assets were $57.6 billion and total debt was $25.5 billion. Net available liquidity was $12.9 billion, including $756 million of unrestricted cash and committed credit facilities of $19.2 billion in total. The debt-to-capitalization ratio improved to 58.2% from 60.2%. Working capital was negative at $967 million, which management attributes mainly to temporary funding of growth capex through construction payables and reduced cash. Credit ratings are investment grade, though a downgrade could raise financing costs.

What drove growth in Liquids Pipelines and what supports future volumes?

Liquids Pipelines adjusted earnings increased to $770 million from $655 million, led by Canadian Mainline ($460 million, up from $432 million) on higher throughput of about 1.74 million bpd, supported by strong western Canadian supply and wide crude price differentials. New Regional Oil Sands assets (Woodland, Wood Buffalo) and expanded Seaway capacity also contributed. Future volume growth relies on market access projects, including Gulf Coast Access, Eastern Access and Light Oil Market Access programs, along with long-term take-or-pay contracts. Management also notes that the Seaway pipeline's 2013 throughput was constrained by third-party takeaway capacity until a lateral was completed in January 2014.

ENBRIDGE INC 10-K FY2013 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 40-F filed February 14, 2014. Cited figures are marked; the original filing is the authoritative source.

Enbridge Inc. (TSX/NYSE: ENB) reported 2013 results in its Form 40-F filed February 14, 2014, with all figures in Canadian dollars under U.S. GAAP.

Earnings attributable to common shareholders fell to $446 million^a ($0.55 per share) from $602 million ($0.78) in 2012, but this decline is driven largely by non-cash, unrealized derivative mark-to-market losses (about $843 million combined across the year per the quarterly data). Management's adjusted earnings, a non-GAAP measure, rose to $1,434 million ($1.78 per share) from $1,241 million ($1.61), a 10.5% increase, which better reflects operating momentum. Operating cash flow increased to $3,341 million from $2,874 million, and capital expenditures reached $8,235 million as the company built out its growth program.

The company's growth backlog of commercially secured projects is approximately $29 billion^b, anchored by three market access programs (Gulf Coast Access at $5.8B, Eastern Access at $2.7B, and Light Oil Market Access at $6.2B). Approximately $5 billion of projects were placed into service during 2013. Liquids Pipelines delivered most of the adjusted earnings growth, led by the Canadian Mainline under the 10-year Competitive Toll Settlement.

Funding was substantial: $1.4B^c of preference shares, $600M of common shares, and $2.8B of medium-term notes were issued, and the Board raised the quarterly dividend 11% to $0.35 per share effective March 1, 2014. Investors should weigh the strong operational trajectory against significant execution, financing, and regulatory exposures, including the Line 6B crude oil release cost estimate of US$1.12 billion (more than the US$650 million insurance policy limit), the pending Northern Gateway decision, and the Line 37 release. Liquidity remained substantial, with net available liquidity of $12.9 billion and a debt-to-capitalization ratio of 58.2% (down from 60.2%).

Credit ratings were investment grade (S&P A-, Moody's Baa1, DBRS A(low)), with stable outlooks. The company's stated payout target is 60%^d to 70% of adjusted earnings, and 2013 payout was 71%, at the upper end of that range.

02—Key points

Key Highlights

Adjusted earnings rose 10.5% to $1,434 million ($1.78 per share) from $1,241 million ($1.61 per share) in 2012, while GAAP earnings to common shareholders fell to $446 million ($0.55 per share) due mainly to unrealized derivative losses.
Cash provided by operating activities increased to $3,341 million from $2,874 million; capital expenditures were $8,235 million, reflecting the buildout of growth projects.
Commercially secured growth projects totaled approximately $29 billion, with about $5 billion placed into service in 2013, including Seaway expansion, Athabasca Pipeline expansion, Flanagan South and Montana-Alberta Tie-Line.
Liquids Pipelines adjusted earnings reached $770 million (up from $655 million), driven by Canadian Mainline throughput under the Competitive Toll Settlement and new Regional Oil Sands assets.
Capital raised in 2013 included $1,428 million of preference shares, $628 million of common equity, and $2,845 million of medium-term notes; the quarterly dividend was raised 11% to $0.35 per common share effective March 1, 2014.
Net available liquidity of $12,909 million at year-end; debt-to-capitalization improved to 58.2% from 60.2%; credit ratings remain investment grade (S&P A-, Moody's Baa1, DBRS A(low)).
Key risks: Line 6B crude oil release cost estimate increased to US$1,122 million, exceeding insurance limits; Northern Gateway awaits a Governor in Council decision expected June 2014 after a favorable JRP report; ongoing Line 37 and Line 14 remediation.

03—Questions

Frequently Asked Questions

Why did GAAP earnings fall while adjusted earnings grew?
GAAP earnings attributable to common shareholders declined to $446 million ($0.55 per share) from $602 million ($0.78) mainly because of unrealized mark-to-market losses on derivatives, which are non-cash and reverse over time as contracts settle. Management's adjusted earnings exclude these items and other unusual or non-operating factors, and rose to $1,434 million ($1.78 per share). Investors should note that adjusted earnings are a non-GAAP measure that is not standardized and may not be comparable to other issuers' figures.
How secure is the dividend, and what is the payout ratio?
The Board declared a quarterly common dividend of $0.35 per share ($1.40 annualized) effective March 1, 2014, an 11% increase. In 2013 the dividend payout was 71% of adjusted earnings per share, slightly above the company's long-term target range of 60% to 70%. Dividends are at the Board's discretion, and no contractual restrictions currently prevent payment. Continued growth depends on sustained cash flow from completed projects and successful funding of the growth program.
What are the largest financial and regulatory risks to the growth plan?
The filing highlights several: (1) Line 6B crude oil release costs of US$1,122 million, which exceed the insurance policy limit, so further costs are not covered; (2) Northern Gateway, which faces five judicial review applications and a Governor in Council decision expected in June 2014, with its cost estimate expected to rise significantly; (3) project execution risk across roughly 44 projects, including cost escalation and in-service delays; and (4) reliance on capital markets and bank facilities to fund approximately $8 billion of annual capex. Foreign exchange, interest rate and commodity exposures are managed through hedging, but unrealized derivative fluctuations continue to create earnings volatility.
How strong is the balance sheet and liquidity position?
At December 31, 2013, total assets were $57.6 billion and total debt was $25.5 billion. Net available liquidity was $12.9 billion, including $756 million of unrestricted cash and committed credit facilities of $19.2 billion in total. The debt-to-capitalization ratio improved to 58.2% from 60.2%. Working capital was negative at $967 million, which management attributes mainly to temporary funding of growth capex through construction payables and reduced cash. Credit ratings are investment grade, though a downgrade could raise financing costs.
What drove growth in Liquids Pipelines and what supports future volumes?
Liquids Pipelines adjusted earnings increased to $770 million from $655 million, led by Canadian Mainline ($460 million, up from $432 million) on higher throughput of about 1.74 million bpd, supported by strong western Canadian supply and wide crude price differentials. New Regional Oil Sands assets (Woodland, Wood Buffalo) and expanded Seaway capacity also contributed. Future volume growth relies on market access projects, including Gulf Coast Access, Eastern Access and Light Oil Market Access programs, along with long-term take-or-pay contracts. Management also notes that the Seaway pipeline's 2013 throughput was constrained by third-party takeaway capacity until a lateral was completed in January 2014.

04—Continue

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