RBC Comments
Enbridge Inc.
Making it simple
Our view: We positively view Enbridge's proposed move to buy-in its
sponsored vehicles to reduce structural complexity. We see the proposed
transactions as increasing cash retention (estimate of $330 million based
on current distributions with upside depending on the DRIP), which helps
the funding plan and credit metrics with an immaterial forecast impact on
consolidated distributable cash flow (we estimate less than 1% dilution).
Key points:
Moves to simplify the structure help enhance the "story". Enbridge
announced proposals to buy back in its sponsored vehicles (Enbridge
Energy Partners/Management - EEP/EEQ; Spectra Energy Partners - SEP;
and Enbridge Income Fund - ENF). The transactions are proposed as
share exchanges, with no required transactional funding. "Structural
complexity" was a key concern for many investors and we believe the
proposed transactions combined with recent actions on funding (i.e.,
asset sales, hybrid issuance) have helped improve the Enbridge "story".
Material cash savings/retention should be good for funding and credit.
Since the sponsored vehicles have higher distribution payouts versus
ENB and trade at higher yields, the proposed transactions are effectively
distribution cuts on a consolidated basis (i.e., less net cash out the door
to public holders). As shown in Exhibit 2 on page 3, we estimate that the
proposed transactions would save Enbridge roughly $330 million a year
based on current dividend rates with potential upside of up to roughly
$500 million depending on the DRIP. The cash that is saved should help
fund the capex plan and reduce external funding requirements.
Immaterial forecast impact on distributable cash flow. Based on
Enbridge's calculation of distributable cash flow (DCF), we estimate that
the transaction is less than 1% dilutive to 2019E DCF/share (please see
Exhibit 3 on page 3) assuming only modest synergies.
No change to management's guidance. Following the announced
transactions, Enbridge reiterated its guidance including no change in
distributable cash guidance, the 10% targeted dividend CAGR through
2020 or its credit metrics. Post-2020, Enbridge sees a tax benefit from the
step-up in the cost basis of the U.S. assets, which should help extend the
low cash taxability for the business post-2020.
Attention now turns to L3R. We believe that the focus for the market
shifts back to the Minnesota Public Utilities Commission (MPUC) decision
for the Line 3 Replacement (L3R) project, which we expect by the end of
June. We believe that there is a high likelihood of approval with the key
question being what route will be chosen (i.e., the "in trench" route or
Enbridge's preferred route). Given the Leech Lake Band's opposition to the
"in trench" route, we believe that there is an increased likelihood that the
MPUC will approve Enbridge's preferred route.
Target price/base case
Our $54/share price target reflects roughly 12x our 2019
ACFFO estimate. That multiple is in-line with Canadian peers
with a comparable growth outlook and dividend coverage and
is within the range of valuations for premium-valued North
American midstream peers.
Upside scenario
Our upside scenario of $63.00 assumes that the shares trade
at a 14x price/ACFFO multiple, which is at the higher-end of
the range of valuations for premium-valued North American
midstream peers. We have applied this multiple to our 2019
forecast.
Downside scenario
Our downside scenario of $35.00 reflects a compression in
the valuation closer to the historical low P/E valuation of 14x,
which could be a function of a slowing of the growth rate to
below 10% (possibly due to a delay in the commissioning of
new projects or a cost overrun on projects where there is no
cost protection), or an environment that strains the ability to
fund the capital plan without issuing new common equity at
the Enbridge Inc. level.
Investment summary
We expect Enbridge to outperform the Energy Infrastructure
companies in our coverage universe for the following reasons:
• Moves to proactively address concerns about the dividend
and funding. We positively view the message around
10% annual dividend growth through a similar level of
ACFFO/share growth. Further, we like the proactive funding
approach on the equity side using a variety of products
including the $3 billion asset sale program for 2018, which
has now been met, along with the potential for even higher
asset sales to further bolster the balance sheet.
• Spectra continues to provide diversification into gas
infrastructure with a premium asset footprint.
We positively view the merger with Spectra that brought a
premium gas infrastructure footprint that should drive
future growth projects as well as providing diversification
away from the high degree of oil infrastructure contribution
from Enbridge on a stand alone basis.
• Strong EPS and cash flow growth. Due to the portfolio
of mostly liquids pipelines projects under construction, we
expect that Enbridge will be able to grow ACFFO/share at a
rate to underpin 10% annual dividend growth through 2020.
We believe that the addition of Spectra puts the company
on a more solid footing to extend a similar level of growth
post 2020.
• Potential catalysts: the announcement of new secured
projects with returns in the 12–14% range; additional steps
on funding; clarity on the L3R project.
• Key risks: (1) ability to fund and construct projects that it
is pursuing on attractive economic terms including securing
funding; (2) the ability to announce new projects that
would help drive future annual dividend growth in the
range of 10% over the medium to longer term; (3) pipeline
cost increases, including integrity costs, remain manageable
within the increase in tolls; (4) a material negative impact on
volumes on the Mainline or other volume sensitive systems;
(5) market reception of acquisitions; (6) long-term interest
rate environment; and (7) continued operation of existing
systems in line with historical financial contributions.