M&A Announcement

May 17, 2018

Welcome to the Enbridge Inc. Business Update. My name is Candice, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session for analysts and the investment community. Please note that this conference is being recorded. I will now turn the call over to Jonathan Gold, Director of Investor Relations. Jonathan, you may begin. Great. Thank you, Candice. Good morning, and welcome to Enbridge Inc. Business update call, where we'll be discussing the corporate simplification transactions that have been proposed and announced earlier today. With me this morning are Al Monaco, President and CEO of Enbridge Inc John Whelan, Executive Vice President and Chief Financial Officer and Vern Yu, Executive Vice President and Chief Development Officer. So as per usual, this call is webcast, and I encourage those listening on the phone to follow along with the supporting slides. A replay of the call will be available later this morning and a transcript will be posted to the website shortly thereafter. In terms of the Q and A, we will prioritize calls from the investment community only. If you're a member of the media, please direct your inquiries to our communications team, who will be happy to respond immediately. We're going to target keeping the call to half an hour today and may not be able to get to everybody. So please limit your questions to 1 and a follow-up as necessary. But as always, we will ensure that our Investor Relations team will be available for your follow-up questions afterwards. Now before we begin, I will just point out that we may refer to forward looking information on today's call. By its nature, this information contains forecast assumptions and expectations about future outcomes, so we remind you that it's subject to the risks and uncertainties affecting every business, including ours. This slide includes a summary of the significant factors and risks that could affect Enbridge and its affiliates and are discussed more fully in our public disclosures filings available on both the SEDAR and EDGAR systems. So with that, I'll now turn the call over to Al Monaco. Thanks, Jonathan. Good morning, and thanks for joining us at this very early time. As you saw from the news release this morning, we've made formal proposals to the boards of each of our sponsored vehicles, SEP, EEP, EEQ and ENF to acquire all of their outstanding public equity securities. This is being done through separate all shared transactions, so we can think of it as a roll up of our sponsored vehicles into Enbridge. I'll make a few comments and then we'll open it up for Q and A, although we're restricted in what we're able to say as we expect to be in discussions with the independent special committees of the sponsor vehicle boards shortly. Most of you know that Enbridge has had a long history with sponsor vehicles dating back to 1991 when EEP was formed to hold our U. S. Liquids mainline system. Lots of activity since then and last year even we took in SEP as part of the Spectra transaction. We've been very strong sponsors of these vehicles and taken numerous actions support them over the years for the benefit of public unit holders of the sponsored vehicles and Enbridge shareholders, including right up to a few months ago by eliminating the IDRs at SEP. For a good portion of their history, our sponsored vehicles provided an attractive alternative source of funding and were effective in optimizing our overall cost of capital. In short, they were very good way to maximize the value of our assets and grow our pipeline business. Even after our supportive and streamlining actions recently, it's clear that these advantages no longer exist. When we rolled out our 3 year plan in December, we made it clear that one of our priorities was to further streamline and simplify our corporate structure and that we were evaluating whether that could be done on a win win basis for the benefit of both sponsored vehicle equity holders and Ambridge. Since then, we've been further we've seen a further weakening in the MLP market generally and in our case being prohibited to access capital. In addition to investor preferences moving away from high payout vehicles, the cumulative impact of a reduced or eliminated tax loans put more pressure on both EEP and SEP as it did on other MLPs with a proportion of cost of service based rates. And in Canada, E and F's cost of funding has increased to the point where its growth will be challenged. And E and F in our view is no longer a cost effective source of funding for Enbridge. So with that context, there are several important and powerful benefits to Enbridge of the sponsor vehicle roll up. These benefits will be realized by current Enbridge shareholders and it's our expectation also by the sponsored vehicle holders who would become ENB owners with these transactions. 1st, it simplifies the corporate structure so that all of our core liquids and natural gas assets are investable through a streamlined Enbridge, where the stability, predictability and growth in cash flows are even more transparent. 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. 2nd, 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, which carry a uniquely low risk profile. 3rd, it's clear that with the recent FERC tax policy and U. S. Tax reform changes, holding our assets in MLP structures is no longer advantageous for Enbridge. The roll up of these MLPs will ensure we maximize cash flow by recovering tax allowance. 4th, and this is important, it's positive from a credit and funding perspective as 100% of the cash flows generated by our assets would be kept in the family and not paid out in 3rd party distributions. And we also retain cash flow to support capital investment. And finally, we are not expecting a change to the 3 year DCF per share outlook. We expect positive impacts post 2020 from tax and other synergies. We also see our proposals as an excellent outcome for the holders of SEP, EEP, EEQ and ENF relative to their standalone outlooks and value. With the share exchange, it's a one time opportunity for our sponsored vehicle investors, not only to maintain interest in the assets they already own today, but also to participate in a very bright future as Enbridge shareholders. They would have a stake in a well diversified asset base across the pipeline utility space in North America with excellent commercial underpinning in these businesses, more opportunity to grow and significantly enhance liquidity and balance sheet strength. In the case of EEQ and SEP, the roll ups eliminate the risk that they would face on a standalone basis being reduced cash flow from the tax allowance changes, a weaker credit profile and a compromised distribution outlook. And their assets would move from a punitive structure to a more efficient one. In the case of E and F, public shareholders there would enjoy ownership in premier gas transmission and gas utility franchises in addition to what they already own and greater liquidity, converting their holdings from a complex income fund structure into ownership of a leading streamlined shareholding in Enbridge. And finally, it's clear that the sponsor vehicles will be challenged going forward raising cost effective capital, thereby affecting their ability to grow. So to summarize, we believe the roll up makes sense for both Enbridge and the sponsor vehicles. We believe the proposed exchange ratios for each of the sponsor vehicles reflects fair value relative to their standalone values and allows owners of all of these entities to participate in the combined benefits of the rollout. We're very pleased to be making these proposals to simplify our corporate structure and take action to mitigate risks raised by the recent FERC and tax reform changes among other things. We're looking forward to discussing the merits of each proposal with their respective sponsored vehicle independent committees. And this last slide we're putting up is really just a recap of the key priorities that we've been talking about since rolled out our 3 year plan. We just reviewed this at our Q1 call and you can see we're making very good progress. And now with this proposal to roll up the sponsor vehicles, you can see that we're moving things along well. So again, for the Q and A session here, we recognize that you've got questions and we'll have more over the coming weeks. Please note though that we will restrict our responses as we expect to be engaging with each of the special committees. It's important that we allow them sufficient time for consideration of the proposals. And we will share information with you as appropriate. So with that, I'm going to hand it back over to the operator to open up the lines for the Q and A. Thank you. We will now begin the question and answer session. And our first question comes from Jeremy Tonet of JPMorgan. Your line is now open. Hi, good morning. It's actually Andy on for Jeremy. Congratulations on the announcement. Hello. Al, I heard a reiteration of the DCF per share guidance to 2020 in your remarks, but what about the dividend growth expectations to 2020? Is that reiterated too? And then also, do you plan on sustaining the current EAP distribution until close of this and also maintain the SEP growth guidance that you've given previously until the close of these transactions? Okay. So on the first part of that, the answer is yes. I mentioned DCF, but that also applies to the other metrics as well-being the dividend growth rate as well, the credit metrics and other key parts of the guidance that we talked about. So yes to that part. Let me see, what was the second question? Just the second question. Right, on the distributions, yes, sorry. On the distributions, as we referred to last time, on the call, we would keep our distributions in place for 2018 or obviously, if the transactions close before then, then that wouldn't be the case. But that is the plan for 2018, simply because we've got the cash flow in hand and we're in good shape to continue to pay those distributions. Great. My follow-up is just on tax treatment. What's the expected tax impact for ENV? And then also, what are what's the expected tax treatment for EAT and SEP public unitholders? Do you expect that this will be a taxable transaction? Well, maybe just to review. So in the case of EEQ and ENF First, those won't be taxable transactions. But for EEP and SAP, they would be. And as you would know, in those cases, it really the taxability is really dependent on when you acquire the units. From our analysis, it looks like there would be minimal tax, if any, paid by the public unitholders of those 2 vehicles. Thanks very much. Congratulations. Okay. Thank you. Thank you. And our next question comes from Ben Pham of BMO. Your line is now open. Hi, thanks. Good morning. Can you hear me okay? Yes, we can. Okay, great. I'm wondering on the there's certainly a couple of different transactions you're proposing, all generally independent. And I'm more curious in events where you get approval for Q2 out of 4 or start 2 out of 3 or 1 out of 3, would that be something that doesn't really matter overall in terms of where you're moving forward? Well, if it's more you have to simplify and whether it's 1 transaction, 2 or 3, you're still moving forward in that path? Yes. I think that's generally right then. So really the only condition here is between EEP and EEQ. So those would both have to be done. But generally speaking, we would proceed with any and all of the transactions that we come to a landing on that works for us and the sponsored vehicles. So that's how we'll proceed. The other thing is though to keep in mind is 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. But for sure, that will mean that we may take or will have to take other actions related to ensuring the stability of that particular vehicle if that happens. But that's how it will work. Okay. And my follow-up is just commentary on improved retained cash flows. And is that referring more to your deconsolidate payout ratios that you're looking at? And any sense of generally how much of an improvement that you saw from that? Or you expect from that? First of all, you're on the right track there. Essentially, what we're doing is retaining all of the cash in house. So I guess maybe the way to look at it is the distributions that were currently paid out stay within the family. And so that you're probably right. That's the way to think of it as the unconsolidated look. As to amount? Ben, that's not something we want to talk about right now, the magnitude of that retained cash flow. Okay. All right. Thanks for everything and congratulations. Okay. Thanks, Ben. Thank you. And our next question comes from Andrew Kuske of Credit Suisse. Your line is now open. Thank you. Good morning. I guess the question is for Al and it's just on the elimination of the structural subordination issue. I assume that you've talked with the debt raters before announcing the transaction. Can you just confirm that to start off with? Yes. We did speak to them about these proposals at least a couple of weeks ago, and we've been obviously keeping them up to date on how we're thinking about it. So again, as I mentioned in my remarks, we think this will be credit positive. John, I don't know if you want to add anything to the discussion? Well, I think that's right. We've been keeping in very close contact with them, and I think they will view it positively generically. Any actions that we take other than the elimination of the public and the payments going out the public would be something that would happen post closing. So then just as a follow-up, obviously, you addressed the cash flow loss from the FERC ruling that gets undone for the MLPs. And then at the ink level, you're just not receiving the distributions from the underlying, but the totality of the underlying cash flows. So you wind up with, I guess, effectively that benefit, the structural subordination goes away. And then I guess indirectly, you eliminate the bailout dilemma, and really the parental support. So is that really part of the strategic rationale if you clean everything up and then drive a higher valuation at the ink level and improve the credit metrics? Is it really credit metric driven more than anything else? Yes. It's the credit metrics, if you think about it, really are the same because on a consolidated we prepare that on a consolidated basis. So the cash is still the cash and the overall debt is still the same. So the metrics per se don't change. But I think you're on the right track because the cash flow that we're retaining from not paying out the distributions is held in house. So that is helpful from a credit point of view. Yes, I think that's right, Al. It's John. You're going to get that benefit. I would say we do look also and the agencies do look at things on an unconsolidated basis as well. And there, it's clear, Andrew, that you will get some improvement up at the holdco level on those metrics right out of the gate as a result of the way we look at this. But in addition, what it does is provide the opportunity, if everybody is within the same house, to do some more efficient overall restructuring ultimately of the debt funding structure for the company. So that's a down the road benefit. Okay. That's helpful. Thank you. Thank you. And our next question comes from Robert Kwan of RBC Capital Markets. Your line is now open. Good morning. Good morning. Just with the guidance, you've got neutral on the 3 year plan. I'm just wondering, are there any comments around 2018 guidance as well as, John, you mentioned your leverage, you look at it from a consolidated perspective, but is there anything particularly in the near term that changes your target metrics? No, nothing changes with our target metrics, Howard. Yes. So essentially, just given the timing of this in particular, and we recently, as you know, would have confirmed the annual guidance, there's really no change expected for 2018, Robert. Okay. And sorry, in the 2018 DCF? Same. Okay. Last just on tax, given it's a share exchange, but I wanted to just confirm, is there anything as part of the transactions that we should be thinking about in terms of tax leakage? Or is there anything that's going to be ongoing that we should be thinking about as you collapse the structures? Yes. I think, well, at a high level, we will get a step up on the proportion of the assets that we're effectively buying from the public unitholders. So that benefit is likely to be seen post-twenty 20. So that's a benefit that will be ongoing from the step up. So that's optimize. So you'll see our run rate cash tax rate of about $400,000,000 to $500,000,000 a year continue for a few years beyond 2020 with this transaction. Okay. So Vern, it's about extending kind of the lower cash taxability. There's no material impact though in the interim? That's correct, Robert. Okay. Thank you. Okay. Thank you. And our next question comes from Ross Payne of Wells Fargo. Your line is now open. Good morning, guys. Given the increased cash flow coming to E and B now and structurally all the assets are there, Is there a chance for a positive outlook by you guys? I know it's viewed as a credit positive, but do you expect any positive outlook or any change in ratings at the E and B level? John? Ross, we'll wait to see what the agencies have to say, but we've been in fairly regular dialogue with them ongoing. I think they'll view it positively. I suspect they will need to see and wait for the transactions to be consummated and everything that flows with that. We'll be very conscious, obviously, as we go through any of that, the bondholders' position through all of this. So I think generally, they will view it positively. But I imagine that they will not take any specific action clearly until the transactions have closed. All right. Thanks, guys. Thank you. Thank you. And our next question comes from Tom Abrams of Morgan Stanley. Your line is now open. Thanks. I missed the first part of the call, so I apologize if you answered this. But in the SEP and EEP situations, take SEP first, you need a majority vote. Is that of the publicly held shares or the overall shares such that you basically control the vote? And then also similarly the EEP, that same logic, what is truly required from the public shareholders? Right. So in the case of SEP, it is the majority of the outstanding units. So we would be able to vote our units in that case. In the case of EEP, it's 2 thirds of the outstanding units that are required. Of the units that you do not hold? That's of the total. Total. So we are Of the total. To both yours. Okay. So the vote is really not a hurdle. All right. I just wanted to make sure I understood that. Thanks a lot. Okay. Thank you. And our next question comes from Linda Ezergailis of TD Securities. Your line is now open. Thank you. I don't know if you're able to share with us some sense of sequencing and timeline, But for E and F, is there some sort of a document that you'll be filing on SEDAR in advance of the vote? And can you comment on any sort of estimated timeline of how this and sequencing of how this might unfold? Right. So we're going to go through the discussions with each of the special committees, Linda. We expect that, that should wrap up hopefully in early Q3. After that, yes, we would be filing the appropriate documents and that would be in advance of the votes that we just talked about. So we're hoping that by the end of the year, or in Q4 sometime that we're able to close off. Okay, that's helpful. Thank you. And can you comment on you mentioned something about the tax synergies post 2020, but can you elaborate on what sort of other synergies directly on your financial results, not just valuation you might realize? Right. Well, essentially, Linda, if you go through the list, it will be retention of the tax allowance. That's the first thing relative to what the status quo would be, I guess, under the FERC changes and the tax rate reductions. We then that's one part of it. The second part of it is what we just talked about the tax deferral. And as Vern pointed out, it's likely to be at least a 2 to 3 year extension of the cash outlook that we have. There's probably some synergies, although we can't quantify that yet, related to John's comments around the credit and hopefully that comes to fruition. And then there will be some other cost synergies along the way here with respect to eliminating public vehicles and so forth. So that's the broad categorization of synergy. That's helpful. Thank you. And again, just final question. I know you might not be able to comment on this at this point, but can you provide the basis that you used for establishing your share exchange other than the share price at market close yesterday? Right. Well, I mean broadly speaking, as I said earlier on, we went through a pretty thorough analysis of what the outlook would be for each of these vehicles. So when you think about things like distribution growth in the future, as we outlined in the release, and what in the case of EAP, for example, what would likely be a cash distribution reduction as early as 2019. And then you think about the overall effectiveness of the vehicle in terms of its ability to raise capital. A couple elements of that, the absolute levels of capital to be raised these days is extremely low, as you know, in the MLP market generally, but then it's the cost of that capital. In our case, I think you know that it's prohibitive. So really, when we look at those things and we put them all together, we're concluding that the values that we offered are fair and that's the basis for the offers that we've made today. Thank you. Thank you. And our next question comes from Harry Mateer of Barclays. Your line is now open. Hey, good morning, guys. This is Greg Price sitting in for Harry. Just one quick question following up on the debt side. I think you may have alluded to it earlier. Just curious if you've contemplated cross guarantees at all within the debt structures going forward following the roll up. Thank you. It's John. It's probably premature to comment on that, but there's a number of different ways that we can affect some of the complexity and structural subordination within the group. I wouldn't comment on anything specific. But we'll be thinking about all of that as we move through this next phase leading into hopefully closing of these transactions. Thank you. Okay. Thank you. And our next question comes from David Galison of Canaccord Genuity. Your line is now open. Hey, good morning, everyone. So just a quick follow-up question. I didn't catch for the dividend growth through 2020, was that still maintained? Yes. The guidance that we confirmed through 2018 and then the 3 year dividend growth rate are unchanged. And you still expect the same targeted payout ratio of 50% to 60%? That's the yes, the payout ratio and all the metrics that we've guided to up to this point haven't changed because of this proposal or the closing of it expected later in the year. Okay. Thank you. And then, how will this impact your funding plan? I know some of the there was no equity that was required outside of the DRIP through the parent, but then, there was opportunities for equity at the subs. So now with the subs rolled up, will that mean that there might be some changes to the I guess, can you talk about what the changes would be to the funding plan? Yes. David, it's John. And again, there was very, very modest amounts of equity that we put into that funding plan. And so really nothing changes overall in terms of the consolidated outlook at this stage. So I wouldn't read anything into that. Okay. And then I was under the understanding that with the E and F structure as is unwinding it would trigger a tax liability. Is that the case? Or can you speak to that as well? No, we didn't no, there wouldn't be the way we're envisioning this transaction to work a tax liability. Okay. All right. Thank you very much. Okay. Thank you. And our next question comes from Dan Lungo of Bank of America Merrill Lynch. Your line is now open. Hi, guys. Sorry, just a follow-up with one more question regarding the structural subordination and addressing that. Are you guys just planning to address the structural subordination between SEP and E and B or would you also want to leave Texas Eastern out on its own? I'd say it's a little bit premature to comment. As you're pointing out, there's debt at various levels of the structure. As you may have noticed, we've been working away over time on simplification exercises. We did one where we have largely eliminated the debts that would have existed at the Spectra Corporation level post merger. And so we'll consider all of those different things as we go to look to finalize the debt structure, and we see how these roll up transactions actually work. So again, probably premature to comment specifically on those things, but we will have obviously the interest of the all the bondholders in mind as we look at that. Okay. Thanks. Thank you, ladies and gentlemen. We've reached our time limit for today's call. I'll now turn the call back over to Jonathan Gould for closing remarks. Great. Thanks, Candace. Again, a lot of ground to cover there and appreciate everyone dialing in on short notice for this exciting news. As always, our IR team will be available to take any follow ups that people may have. So as a reminder, contacts are myself, Jonathan Gould for Enbridge Inc. Related matters, Nafisa Chasm for Enbridge Income Fund and Ronnie Cappadonna for all Spectra Energy Partners and Enbridge Energy Partners specific follow ups. So thank you everyone for your time this morning. Have a great day. Ladies and gentlemen, this does conclude today's conference. Thank you for participating and you may now