01—Abstract
Summary
Summary of the 40-F filed February 19, 2016. Cited figures are marked; the original filing is the authoritative source.
Enbridge Inc. (NYSE/TSX: ENB) reported a net loss attributable to common shareholders of C$37 milliona (-C$0.04 per share) for fiscal 2015, versus earnings of C$1,154 million (C$1.39 per share) in 2014.
The swing was driven largely by non-cash and one-time items: C$1,380 millionb of unrealized derivative fair value losses, a C$440 million goodwill impairment at Enbridge Energy Partners (EEP) natural gas and NGL businesses, and C$351 million of charges tied to the Canadian Restructuring Plan. Management's adjusted earnings, a non-GAAP measure, rose to C$1,866 million (C$2.20 per share) from C$1,574 million (C$1.90 per share), and available cash flow from operations (ACFFO) grew to C$3,154 million from C$2,506 million. Investors should weigh the adjusted figures against the GAAP loss, since the adjusting items are large and recurring in nature for a hedged midstream business.
The defining event of the year was the September 1, 2015 Canadian Restructuring Plan, under which Enbridge transferred its Canadian Liquids Pipelines business and certain renewable assets to the Fund Group for C$30.4 billionc of consideration, raising Enbridge's economic interest in the Fund Group to 91.9% (later 89.2% after a November equity issuance). This sponsored-vehicle strategy supports a 14% dividend increase to C$0.53 per quarter effective March 2016, with a stated payout target of 40-50% of ACFFO. The transaction also prompted credit rating downgrades: DBRS cut senior debt to BBB (high), Moody's to Baa2, and S&P to BBB+, all with stable outlooks.
Looking forward, Enbridge's roughly C$18 billiond of remaining secured growth projects are expected in service by 2019, with about C$2 billion coming online in 2016. Key execution and regulatory risks include the Canadian Line 3 Replacement Program (C$4.9 billion), Sandpiper (US$2.6 billion), and Northern Gateway, the last of which faces ongoing judicial review and a substantially higher cost estimate. Crude oil prices falling below US$30 per barrel in January 2016 introduce volume and producer-investment risk, though management states that its largely take-or-pay and tolling structures should limit the impact on earnings and cash flow.
02—Key points
Key Highlights
- GAAP net loss to common shareholders of C$37M (-C$0.04/share) in 2015, versus C$1,154M (C$1.39/share) in 2014, driven by C$1.38B in unrealized derivative losses, a C$440M goodwill impairment at EEP, and C$351M in restructuring-related charges
- Adjusted earnings (non-GAAP) rose 19% to C$1,866M (C$2.20/share) from C$1,574M (C$1.90/share), and ACFFO increased 26% to C$3,154M from C$2,506M
- Canadian Restructuring Plan closed September 1, 2015: C$30.4B transfer of Canadian Liquids Pipelines and renewable assets to the Fund Group, with Enbridge's economic interest reaching 91.9% before a later issuance reduced it to 89.2%
- Quarterly common dividend raised 14% to C$0.53 per share (C$2.12 annualized) effective March 1, 2016, with a long-term target payout of 40-50% of ACFFO; the 2015 payout was 50.0%
- Credit ratings were downgraded across agencies following the restructuring (DBRS to BBB (high), Moody's to Baa2, S&P to BBB+), though all outlooks were revised to stable
- Growth program: approximately C$8B of projects placed in service in 2015 and about C$18B remaining, with about C$2B due in 2016 and the balance by 2019; the C$7.5B Line 3 Replacement Program is the largest project in company history
- Key regulatory and execution risks include Northern Gateway (cost estimate substantially increased, judicial review pending), Sandpiper and U.S. Line 3 delays from a Minnesota order, and Canadian Line 3 approval timing following a federal process change
03—Questions
Frequently Asked Questions
Why did Enbridge report a loss in 2015 when adjusted earnings grew?
The GAAP loss of C$37 million reflected several large items excluded from adjusted earnings: C$1,380 million of unrealized derivative fair value losses (largely foreign exchange hedges that offset long-term economic exposures), a C$440 million goodwill impairment at Enbridge Energy Partners' gas and NGL businesses, C$351 million of one-time charges from the Canadian Restructuring Plan, and C$39 million of tax on intercompany transfers. Management argues that the hedging losses are offset by underlying economic value, and adjusted earnings of C$1,866 million better reflect operating performance.
Is the dividend sustainable after the 14% increase?
Management targets a dividend payout of 40-50% of ACFFO. The 2015 payout was 50.0% of ACFFO (C$1.86 per share paid), and the 2016 increase to C$2.12 annualized will push the payout toward the upper end of that range, depending on ACFFO growth. Cash flow coverage depends on continued execution of the growth program and stable contributions from the sponsored vehicles, which carry their own financing needs; the Fund Group plans to issue C$600-800 million of public equity per year through 2018 to fund its investment.
What were the main effects of the Canadian Restructuring Plan on Enbridge?
Enbridge transferred its Canadian Liquids Pipelines business (Canadian Mainline and Regional Oil Sands System) and certain renewable energy assets to the Fund Group in exchange for C$18.7 billion of Fund Group units, with the Fund Group also assuming about C$11.7 billion of debt. The Canadian Mainline results are now reported within Sponsored Investments rather than Liquids Pipelines, which reduces the reported Liquids Pipelines segment and changes year-over-year comparability. The transaction also required de-designation of interest rate hedges (C$247-338 million loss) and a C$88 million write-off of a tax regulatory asset.
What are the biggest project risks heading into 2016?
Northern Gateway faces Federal Court judicial review, with a potential Supreme Court appeal, and its final cost is expected to be substantially higher than earlier estimates. Sandpiper (US$2.6 billion) and the U.S. Line 3 Replacement Program (US$2.6 billion) face delays after a Minnesota Public Utilities Commission order requiring an environmental impact statement before permitting proceeds. The Canadian Line 3 Replacement Program (C$4.9 billion) faces timing uncertainty from a January 2016 federal directive to conduct additional greenhouse gas and consultation assessments. Management notes that cost increases and delays are possible on these projects.
How exposed is Enbridge to the collapse in oil prices?
Management states that most earnings and cash flow come from tolls and fees on long-term take-or-pay, cost-of-service, or fee-based contracts, which limits direct commodity price exposure. The Canadian Mainline's Competitive Toll Settlement does expose the company to throughput risk, but nominations continued to exceed capacity entering 2016. The more commodity-sensitive components are Energy Services, Aux Sable, and EEP's natural gas and NGL businesses, which contributed lower adjusted earnings in 2015 and drove the goodwill impairment. Enbridge also reports that shipper reductions in drilling are not expected to materially affect results, though producer deferrals could affect longer-term supply growth from the Western Canadian Sedimentary Basin.
04—Continue