Calgary-based Enbridge Inc., following a route by other North American pipeline operators, on Tuesday agreed to acquire the remaining stakes in three North American units for about $7 billion, bringing all of its natural gas and liquids assets under one umbrella.
The streamlining to a single, publicly traded entity is designed to benefit shareholders and unitholders, and it mirrors in part an industry trend by pipeline operators to fold in master limited partnerships because of changes made by FERC earlier this year.
Enbridge in August said it would acquire affiliated MLP Spectra Energy Partners LP (SEP) in an all-stock transaction valued at $3.3 billion (C$4.3 billion). Separate agreements now have been reached with entities Enbridge Energy Partners LP (EEP), Enbridge Energy Management LLC (EEQ) and Enbridge Income Fund Holdings Inc. (ENF).
“Significant weakening of the U.S. MLP capital markets has adversely affected the growth opportunities for MLPs, including EEP,” management said. “MLPs are dependent on consistent access to capital markets at an effective cost of capital to fund projects to grow their distributions.”
The Federal Energy Regulatory Commission in July unanimously approved a final rule to no longer allow MLP interstate natural gas and oil pipelines to recover income tax allowances in cost of service rates. Since the ruling, simplified structures to eliminate MLPs have been launched by Williams, Energy Transfer Partners LP and Loews Corp.
The FERC order and the regulatory rate impact from the U.S. Tax Cuts and Jobs Act enacted late last year “have had a net significant adverse impact on EEP,” Enbridge management said. “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 should be “attractive to EEP unitholders and EEQ shareholders, particularly in light of EEP's expected distribution reduction as a stand-alone entity.”
The combination would allow unitholders and shareholders “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,” management said.
The secured growth profile, it said, also would underpin an expected 10% annual dividend growth through 2020. Beyond 2020, growth would be supported by a stronger cost of capital, reducing risks “related to continued uncertainty and potential unfavorable changes applied to MLPs related to the revised FERC tax allowance policies.”
In combination with the ENF and SEP buy-ins, Enbridge expects no revision to its current three-year guidance.
The transactions have been approved by the Enbridge board; EEP unitholders and EEQ shareholders still have to vote in favor of the agreements, expected in 4Q2018, before they take effect.