Enbridge takes steps toward corporate structure simplification
Published by Lydia Woellwarth,
Enbridge Inc., on behalf of itself and certain of its wholly owned US subsidiaries, Enbridge Energy Partners, L.P. (EEP) and Enbridge Energy Management, L.L.C. (EEQ) has announced that they have entered into separate definitive agreements under which Enbridge will acquire all of the outstanding public Class A common units of EEP and all of the outstanding public Listed Shares of EEQ. The acquired equity of the combined transactions is valued at US$3.5 billion based on the closing price of Enbridge's common shares on the New York Stock Exchange on 17 September 2018.
Pursuant to the Agreement for the EEP buy-in, EEP public unitholders will receive 0.3350 common shares of Enbridge for each Class A common unit of EEP (EEP Exchange Ratio), which represents an 8.7% increase to the exchange ratio proposed by Enbridge on 17 May 2018, of 0.3083 Enbridge common shares per EEP Class A common unit. Pursuant to the Agreement for the EEQ buy-in, EEQ public shareholders will receive 0.3350 common shares of Enbridge for each Listed Share of EEQ (EEQ Exchange Ratio), which is at parity with the EEP Exchange Ratio.
These Agreements, in conjunction with the definitive agreement reached with Enbridge Income Fund Holdings Inc. (ENF) recently announced, and the previously announced definitive agreement reached with Spectra Energy Partners, LP (SEP) on 24 August 2018, represent the achievement of significant milestones in the simplification of Enbridge's corporate structure. Upon closing of these buy-in transactions, the rollup of these sponsored vehicles will streamline Enbridge's corporate and capital structures and brings all of the core liquids and gas pipeline assets under the umbrella of a single publicly-traded entity to the benefit of all shareholders and unitholders.
Benefits and considerations for EEP unitholders and EEQ shareholders
Significant weakening of the US Master Limited Partnership (MLP) capital markets has adversely affected the growth opportunities for MLPs, including EEP. MLPs are dependent on consistent access to capital markets at an effective cost of capital to fund projects to grow their distributions. The respective 15 March and 18 July 2018 income tax allowance policy announcement and order by the Federal Energy Regulatory Commission (FERC), and the regulatory rate impact from the US Tax Cuts and Jobs Act have had a net significant adverse impact on EEP. If EEP were to continue as a stand-alone entity, after taking into account its lower revenue and weak MLP capital markets, it would be required to transition to a self-funding model with no cost-effective access to equity capital. EEP's priority would be to strengthen its balance sheet, which would require near term incremental Enbridge support, and reduce its distributions, which would have corresponding negative implications to EEQ. The transaction premiums are attractive to EEP unitholders and EEQ shareholders, particularly in light of EEP's expected distribution reduction as a stand-alone entity. The EEP Exchange Ratio and EEQ Exchange Ratio represent an 8.7% and 16.0%, respectively, increase to the exchange ratio proposed by Enbridge on 17 May 2018.
These transactions offer EEP public unitholders and EEQ public shareholders a superior investment proposition in Enbridge common shares, including:
- Direct ownership in the largest energy infrastructure company in North America comprised of premium liquids transportation, natural gas transmission and natural gas distribution utility franchises that generate diverse, safe and reliable cash flows.
- A secured growth profile which underpins expected 10% annual dividend growth through 2020 with substantially enhanced dividend coverage compared to EEP standalone.
- A diverse opportunity set for continued growth beyond 2020 that is supported by a strong cost of capital.
- A stronger balance sheet and superior credit profile.
- Reduction in risks related to continued uncertainty and potential unfavourable changes applied to MLPs related to the revised FERC tax allowance policies.
- Increased opportunity for further meaningful capital appreciation as Enbridge advances its strategic priorities, including simplification of the Enbridge corporate structure, improved financial position and organic growth projects not currently available to EEP shareholders.
- Enhanced trading liquidity.
Benefits and considerations for Enbridge shareholders
The buy-ins of EEP and EEQ are strategically and economically attractive to current and future Enbridge shareholders and provide substantial benefits, including:
- Increased ownership in its core businesses and further enhancement of its industry-leading, low-risk profile.
- Significant advancement of Enbridge's strategy to simplify and streamline its corporate structure which further increases the transparency of its strong cash generating assets.
- Higher retention of cash generated from the EEP assets, which will support continued strong dividend coverage and self-funded growth.
- An improved Enbridge credit profile due to the elimination of EEP public distributions, as well as opportunities to minimise the structural subordination of Enbridge debt.
- Significant benefits to Enbridge's post 2020 outlook primarily due to tax optimisation synergies.
- Reduction in risks related to uncertainty and potential unfavourable changes associated with regulatory tax policies applied to MLPs and incremental Enbridge support required by EEP in difficult capital markets.
- No change to consolidated EBITDA following completion of the EEP and EEQ buy-in transactions since the assets held by EEP and EEQ are already managed and operated by Enbridge's US subsidiaries and consolidated for accounting purposes by Enbridge.
Considering these transactions, in combination with the ENF and SEP buy-ins, there is no change to Enbridge's current three year financial guidance, including the 10% dividend growth rate through 2020, supported by several positive developments in the business, including the success of Enbridge's recent asset divestiture programme which has exceeded expectations.
Read the article online at: https://www.worldpipelines.com/business-news/18092018/enbridge-takes-steps-toward-corporate-structure-simplification/
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