Enbridge offers $11.4 billion in stock to investors in 4 affiliate companies

Enbridge Inc. announced a restructuring plan Thursday that would see it offer $11.4 billion in shares to co-investors in four affiliated businesses, in order to offset risks caused by the loss of a U.S. tax allowance for certain interstate pipelines.

If the series of transactions unfold as anticipated, investors in all the companies and limited partnerships would hold shares in Enbridge, one of North America's largest energy infrastructure companies.

The Calgary-based company holds pipelines in the United States that are losing tax advantages previously provided to so-called master limited partnerships, or MLPs. Enbridge has two MLPs, Enbridge Energy Partners and Spectra Energy Partners.

The U.S. Federal Energy Regulatory Commission (FERC) decision to end the tax breaks in March came in response to a 2016 court ruling that found its long-standing tax policy could result in double recovery of costs for MLPs.

'Core assets under one roof'

The company's move comes after Enbridge had already begun to simplify its organizational structure.

"Having all of our core assets under one roof will further surface the value of these highly strategic and irreplaceable systems, which should attract a premium valuation," chief executive Al Monaco told analysts Thursday.

He added that the moves would be good for credit ratings and funding arrangements because 100 per cent of the cash flow generated by the assets would be "kept in the family and not paid out in third-party distributions."

Earlier this month, the company announced more than $3 billion in asset sales in a pair of deals including a $1.75-billion agreement to sell a 49 per cent stake in a group of renewable power assets to the Canada Pension Plan Investment Board. In a separate deal, Enbridge said it will sell Midcoast Operating LP to an affiliate of private equity firm ArcLight Capital Partners LLC for about $1.44 billion.

Separate boards

Under the series of deals announced Thursday, Enbridge is proposing separate all-share offers with the boards of Spectra Energy Partners, L.P., Enbridge Energy Partners, L.P., Enbridge Energy Management, L.L.C. and Enbridge Income Fund Holdings Inc., offering them company shares worth a total of roughly $11.4 billion based on current stock prices.

While Enbridge is the leading investor in each of the businesses, which are considered "sponsored vehicles," each has a board with a duty to get the best possible deal for other stakeholders.

Monaco said Enbridge believes that its proposal will benefit other investors as well by providing them with a direct equity stake in the main company, but acknowledged that it's possible not all of the transactions will be accepted.

"If for some reason we can't proceed with one of them, because we can't come to an agreement, then obviously we'll have to think about other things," he said.

"For sure that will mean we may take, or will have to take, other actions to ... ensure the stability of that particular vehicle, if that happens."

Effects looming

Enbridge said that Spectra and Enbridge Energy Partners face a cessation of distribution growth and a compromised outlook for their unitholders as early as 2019, which will have an impact on the other entities.

The company had previously estimated that Enbridge Energy Partners was expected to experience an $80-million decrease in annual distributable cash flow because of the FERC decision, somewhat offset by a revenue increase on the Canadian Mainline system held by Enbridge Income Fund Holdings Inc.

It said that about 60 per cent of Spectra's gas pipeline revenue comes from negotiated or market-based tariffs and are not directly affected by the FERC policy revisions but the remainder is from cost of service-based tariffs, which could be affected.

The plan, if accepted on the proposed terms, would simplify the Enbridge corporate structure with a neutral impact on its current three-year financial guidance and result in a positive impact after 2020, it said Thursday.

Monaco said that Enbridge's previously announced targets for dividend growth aren't affected by the re-organization.

He added that the company is aiming to complete the transactions by the fourth quarter of 2018.