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

CALGARY — A U.S. agency’s move to kill off a tax loophole enjoyed by certain Enbridge Inc. pipeline subsidiaries in the United States has prompted the company to launch an $11.4-billion initiative to buy back those entities and fold them into a simplified corporate structure.

And the Calgary-based company is not alone.

Its announcement Thursday coincided with news that American pipeline operators The Williams Cos. and Cheniere Energy Inc. have launched similar multibillion-dollar offers to use their shares to buy out partners in their master limited partnerships (MLPs).

MLPs are tax-exempt corporate structures in the United States that pay their profits to investors in dividend-style distributions.

In 2016, a U.S. Appeals Court ruled that energy regulators were allowing these companies to benefit from a “double recovery” of taxes, prompting a Federal Energy Regulatory Commission decision in March to end the tax breaks.

Enbridge said the decision hurts its subsidiaries by cutting their distributable cash flow. It also has weakened their credit worthiness and ability to raise money from investors, a process that fuels “drop-downs” of assets from Enbridge Inc. in return for cash to support its growth.

“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,” Enbridge CEO Al Monaco told analysts on a conference call Thursday.

He added the moves will 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.”

Analyst Gavin MacFarlane, a vice-president at Moody’s Investors Service, agreed that the Enbridge move is “credit positive” although it doesn’t address all concerns about the company’s complicated debt structure.

“Clearly, this type of transaction would be a big first step toward simplifying the organizational structure of the company,” he said.

“It doesn’t address the structural subordination of Enbridge Inc. creditors but on the call they indicated they will look at different ways of addressing some elements of the capital structure around the time of completion.”

Moody’s downgraded its Enbridge credit rating last year after the company’s $37-billion takeover of U.S.-based Spectra Energy inflated its debt.

Earlier this month, TC PipeLines LP, a U.S. pipeline partnership 25 per cent owned by Calgary-based TransCanada Corp., said it would slash distributions to unitholders by 35 per cent due to the FERC move to kill the tax break. It said it is also considering a corporate reorganization.

TransCanada filed a request in April for clarification and, potentially, a re-hearing on how the FERC’s proposed changes will affect entities that don’t have typical MLP ownership structures. A spokesman said Thursday there was no update on the situation.

If the series of transactions unfold as anticipated, investors in all the Enbridge companies and limited partnerships will exchange their shares for shares in Enbridge Inc., one of North America’s largest energy infrastructure companies.

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.

Only Enbridge Energy Partners and Spectra Energy Partners are MLPs but Enbridge said the FERC ruling has negatively affected all four.

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.

The plan, if accepted on the proposed terms, will have a neutral impact on Enbridge’s current three-year financial guidance and result in a positive impact after 2020, it said Thursday.

Monaco said the company is aiming to complete the transactions by the fourth quarter of 2018.

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.

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