Enbridge considers $11.4B restructuring

End of U.S. tax loopholes behind company decision

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

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 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 on 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 organi- zational structure of the company,” he said.

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.

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