Enbridge shares hit new high after drop-down restructuring

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Enbridge Inc. shares surged to a new high on a sweeping plan to restructure its finances by transferring $17-billion of Canadian assets into an income fund it controls, allowing the pipeline company to bump up its dividend by a third.

In what is known as a drop-down, Enbridge is shifting ownership of the Canadian portion of its main oil pipeline network, its regional oil sands lines in Alberta and wind farms into the Enbridge Income Fund. The move will lower the cost of funding $44-billion of new projects it has on the drawing board, it said.

The parent company has not garnered sufficient value in the stock market despite a solid record of increases in earnings per share and a long list of planned projects that will boost cash flow, said Al Monaco, Enbridge's chief executive officer. It has several developments in the works apart from those facing lengthy delays, such as the contentious Northern Gateway oil line to the West Coast from Alberta.

Investors drove Enbridge shares up more than 11 per cent to a record high of $60.70 on the Toronto Stock Exchange, even as energy shares continued their steep recent slide along with oil prices. Enbridge investors were elated by the initial dividend increase and further expected dividend increases of 14 per cent to 16 per cent annually between 2015 and 2018.

Enbridge Income Fund., meanwhile, jumped 8 per cent to a new high of $33.91.

Its shareholders will be beneficiaries of a much larger suite of assets that will now expand, spelling higher payouts. Enbridge currently has a 65-per-cent stake in EIF.

Enbridge rival TransCanada Corp. has found itself in the crosshairs of an activist investor, which is pushing for a similarly aggressive drop-down of assets as well as a split-up of divisions as a way to boost value for shareholders.

Enbridge said it has not been pushed into its restructuring by outsiders, though the move will likely head off any potential approaches.

"We have a very strong base plan, previous to this change in payout policy and previous to the drop-down announcement, but the reality is, in order for us to be competitive, we need to be ensuring that our valuation is maximized," Mr. Monaco said in a conference call to explain the move, the company's largest-ever financial restructuring, announced late Wednesday.

"It's our job to do that, and we think that this structure in combination with the dividend payout will hopefully be reflected in the marketplace," he said.

Mr. Monaco said the company is contemplating a similar move with the U.S. portion of its oil mainline, the main conduit for shipping Canadian oil supplies to refineries in the U.S. Midwest, Midcontinent and into Eastern Canada.

The restructuring is positive for holders of both entities, because it adds to each one's earnings per share, Steven Paget, analyst at FirstEnergy Capital Corp., said in a research note.

Under the plan, Enbridge will transfer ownership of the assets, which are valued at $17-billion, into the fund in exchange for a higher equity stake. Once the deal is completed, Enbridge will own about 90 per cent of EIF and will keep operating the assets.

Essentially, the move shifts Enbridge's financing to the income fund. As a high-payout entity, EIF has a lower cost of capital to fund expansion projects than the parent company, Vern Yu, Enbridge's vice-president of corporate development, said in an interview.

"That's allowing us to finance our growth projects at a lower cost of equity, which translates into improved shareholder returns for Enbridge Inc.," Mr. Yu said.

"By shifting that equity need from Enbridge Inc. to Enbridge Income Fund, it also allows us to increase the dividend at Enbridge Inc."

Under the plan, EIF will issue $400-million to $800-million of equity each year.