Why did reported earnings rise so sharply despite large impairments?

Earnings were lifted by a C$850 million pre-tax gain on the December 2016 sale of the South Prairie Region assets and by unrealized derivative fair value gains of about C$543 million in EBIT. Without these items, the underlying picture is better captured by adjusted EBIT (C$4,662 million) and adjusted earnings (C$2,078 million, or $2.28 per share).

What does the Spectra Energy merger mean for existing Enbridge shareholders?

Enbridge shareholders would own about 57% of the combined company, and Spectra holders about 43%. Management expects the quarterly dividend to rise about 15% above the 2016 rate of $0.530 after closing, with 10%-12% annual dividend growth through 2024 while maintaining a 50%-60% ACFFO payout. Closing depends on Canadian Competition Bureau review and other customary conditions, and there is no assurance of completion.

How exposed is Enbridge to commodity prices?

Most earnings come from tolls and take-or-pay or fee-based contracts, and management says earnings and cash flow are not expected to be materially affected by low prices. Exposure is concentrated in Energy Services (adjusted EBIT only C$28 million in 2016, down from C$61 million) and in U.S. Midstream, where adjusted EBIT fell to C$5 million amid reduced producer drilling.

What are the main risks to the dividend and growth plan?

Key risks include Line 3 replacement cost and in-service delays tied to Minnesota regulatory timing, Line 6B environmental and civil penalty costs, Line 5 easement uncertainty on the Bad River Reservation, possible Canadian Mainline throughput shortfalls from apportionment changes, and the need to fund about US$1.5 billion of Bakken Pipeline investment and the Fund Group's equity needs. Credit rating pressure after the merger announcement could also raise financing costs.

ENBRIDGE INC 10-K FY2016 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 40-F filed February 17, 2017. Cited figures are marked; the original filing is the authoritative source.

Enbridge's 2016 Form 40-F (filed February 17, 2017) shows a company whose earnings and cash flow are anchored in tolled, largely take-or-pay liquids pipelines, with 2016 EBIT of C$4,041 million^a and adjusted EBIT of C$4,662 million, up from C$4,156 million in 2015.

Reported earnings attributable to common shareholders were C$1,776 million^b ($1.95 per share), a swing from a 2015 loss, helped by an C$850 million gain on the South Prairie Region sale and offset by roughly C$2 billion of impairments, including Sandpiper, Northern Gateway, and Eddystone Rail. ACFFO rose to C$3,713 million, and the dividend payout was 52% of ACFFO, above the 40%-50% target range. The dominant event is the pending C$37 billion (US$28 billion) stock-for-stock merger with Spectra Energy, expected to close in Q1 2017.

It would create a company with about 50%^c non-liquids assets and a dividend increase of roughly 15%, with ongoing dividend growth targeted at 10%-12% per year through 2024. Enbridge's management highlights its low commodity price exposure, but investors should note the sponsored-vehicle structure (Fund Group and Enbridge Energy Partners), the growing reliance on those vehicles for funding, and that the Northern Gateway project is effectively cancelled.

Debt capitalization improved to 62.1% from 65.5%, though credit outlooks were placed under review or negative after the merger announcement, and net available liquidity was about C$14.3 billion^d. The filing also flags execution and regulatory risk, including Line 3 replacement cost and schedule uncertainty, the Line 6B legal and penalty exposure, the Line 5 easement non-renewal by the Bad River Band, and continued oil sands and low-price headwinds for upstream production.

02—Key points

Key Highlights

2016 EBIT of C$4,041 million vs. C$1,635 million in 2015; adjusted EBIT of C$4,662 million (up 12%) driven by Liquids Pipelines (adjusted EBIT C$3,958 million).
Net earnings to common shareholders of C$1,776 million (EPS C$1.95) versus a C$37 million loss in 2015, aided by an C$850 million pre-tax gain on the South Prairie Region asset sale.
Impairments totaling roughly C$2.0 billion in 2016 (including Sandpiper ~C$1.0 billion, Northern Gateway C$373 million, Eddystone Rail C$184 million, and other asset charges), a material drag on reported results.
ACFFO of C$3,713 million (up from C$3,154 million); dividend payout of 52% of ACFFO vs. a 40%-50% target range.
Pending Spectra Energy merger (~C$37B equity value; Enbridge holders ~57% of combined company) expected to close Q1 2017, with a targeted ~15% dividend increase and 10%-12% annual dividend growth through 2024.
Liquidity of C$14.3 billion net available at year-end; debt-to-total-capital improved to 62.1% from 65.5%, though DBRS placed ratings under review and Moody's kept a negative outlook.
Key risks: Line 6B crude release costs and US$61 million Clean Water Act penalties, Line 3 replacement schedule/cost pressure, Northern Gateway cancellation, and the Bad River Band's non-renewal of Line 5 easements.

03—Questions

Frequently Asked Questions

Why did reported earnings rise so sharply despite large impairments?
Earnings were lifted by a C$850 million pre-tax gain on the December 2016 sale of the South Prairie Region assets and by unrealized derivative fair value gains of about C$543 million in EBIT. Without these items, the underlying picture is better captured by adjusted EBIT (C$4,662 million) and adjusted earnings (C$2,078 million, or $2.28 per share).
What does the Spectra Energy merger mean for existing Enbridge shareholders?
Enbridge shareholders would own about 57% of the combined company, and Spectra holders about 43%. Management expects the quarterly dividend to rise about 15% above the 2016 rate of $0.530 after closing, with 10%-12% annual dividend growth through 2024 while maintaining a 50%-60% ACFFO payout. Closing depends on Canadian Competition Bureau review and other customary conditions, and there is no assurance of completion.
How exposed is Enbridge to commodity prices?
Most earnings come from tolls and take-or-pay or fee-based contracts, and management says earnings and cash flow are not expected to be materially affected by low prices. Exposure is concentrated in Energy Services (adjusted EBIT only C$28 million in 2016, down from C$61 million) and in U.S. Midstream, where adjusted EBIT fell to C$5 million amid reduced producer drilling.
What are the main risks to the dividend and growth plan?
Key risks include Line 3 replacement cost and in-service delays tied to Minnesota regulatory timing, Line 6B environmental and civil penalty costs, Line 5 easement uncertainty on the Bad River Reservation, possible Canadian Mainline throughput shortfalls from apportionment changes, and the need to fund about US$1.5 billion of Bakken Pipeline investment and the Fund Group's equity needs. Credit rating pressure after the merger announcement could also raise financing costs.

04—Continue

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