Enbridge Inc. is making good on a promise to untangle its structure by buying out its four publicly traded subsidiaries for $11.4-billion in stock.
The proposed move will result in all of its partly owned units – Spectra Energy Partners LP, Enbridge Energy Partners LP, Enbridge Energy Management LLC and Enbridge Income Fund Holdings Inc. – being folded back into the parent company at various prices in the form of Enbridge shares.
The transactions are aimed partly at removing a thick layer of complexity blamed for weighing down the stock following the pipeline and utility company’s $37-billion takeover of Spectra Energy in 2017.
The units had been alternative sources of financing for Enbridge as it invested in major projects. The buyout or “roll-up” of what are known as sponsored vehicles, which have their own boards of directors and stock listings, follows $3.2-billion of recent asset sales that are also aimed at streamlining the company as well as reducing debt taken on for the Spectra deal.
Al Monaco, Enbridge’s chief executive officer, said cash flow from the varied oil and gas pipelines and utilities will be consolidated under one corporate umbrella, with the aim of returning to a richer valuation in the market.
“With the roll-up we’re acquiring more of what we already own, which we believe are the best energy infrastructure assets in the business and which carry a uniquely low-risk profile,” Mr. Monaco told analysts.
Recent tax changes in the United States relating to some sponsored-vehicle entities have rendered them unattractive as a source of funding, he said.
The Federal Energy Regulatory Commission announced this year it will no longer allow master limited partnerships that own interstate pipelines to recover income tax allowances in contracts that their customers sign for service on their system, as had previously been the case. Enbridge said at the time it did not expect a material impact on its financial targets.
Indeed, on Thursday, two other major energy infrastructure companies – Oklahoma-based Williams Cos. and Cheniere Energy Inc. of Houston – announced offers to buy out public investors in their own master limited partnerships, bringing the total value of the similar deals to nearly US$20-billion.
Previously, Enbridge had transferred or “dropped down” ownership of interests in its pipelines and other assets to the units – essentially selling them to the related entities – as an alternative to debt and equity markets as a source of cash. Of the sponsored vehicles, only Enbridge Income Fund is listed in Canada.
Enbridge shares are down 14 per cent this year, reflecting investor concern about the company’s ability to fund dividend payments and $22-billion in planned expansions. Those include the massive Line 3 oil pipeline replacement from Alberta to Wisconsin, which is facing regulatory roadblocks and opposition from native groups in Minnesota.
Major investors have also complained that Enbridge’s multiple tentacles made evaluating the company’s finances and prospects difficult. The shares rose 31 cents to $42.11 on the Toronto Stock Exchange after the deals were announced on Thursday. The stock closed at $42.19.
Late last year, Moody’s Investors Service Inc. downgraded Enbridge’s debt to one notch above junk status, sounding a warning that its plans to reduce leverage would be slow to deliver results. Since then, however, Enbridge has beat its own targets for asset sales.
Enbridge said this month it is selling a 49-per-cent stake in various wind and solar energy assets in North America and Germany for $1.75-billion to the Canada Pension Plan Investment Board. It also announced private-equity firm ArcLight Capital Partners LLC will buy natural-gas gathering and processing assets in Texas, Oklahoma and Louisiana for about $1.44-billion.
Moody's said the roll-up of the units is positive for Enbridge’s debt profile, though does not remove all the complexity. It did not adjust the company’s ratings. Another bond rater, DBRS Inc., said the company’s shift to complete control of the operations is positive, as the company will no longer have to consider the economic impact of its decisions on so many varied stakeholders.
Enbridge said it will issue 272 million shares for the buyouts. The roll-up is not expected to mean changes to financial targets for the next three years, though there may be benefits after 2020 due savings on taxes and other aspects, Enbridge said.
Merrill Lynch and Bank of Nova Scotia are financial advisers to Enbridge for the transactions.