PrefBlog

Well, that didn’t take long! On September 6 I reported ENB Acquiring Spectra: Ratings Effect Unclear, with DBRS placing ENB and W on Review-Developing.

Today, DBRS announced that it:

maintained the following ratings of Enbridge Inc. (ENB) Under Review with Developing Implications, where they were placed on September 6, 2016:

— ENB, Issuer Rating of BBB (high)
— ENB, Medium-Term Notes & Unsecured Debentures rated BBB (high)
— ENB, Cumulative Redeemable Preferred Shares rated Pfd-3 (high)
— ENB, Commercial Paper rated R-2 (high)
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DBRS had the opportunity to meet with the senior management teams of both companies prior to the Transaction being announced to discuss details of the merger. DBRS was also provided with considerable documentation relating to the Transaction. After a review of the information provided and the September 6, 2016 announcement, followed by the conference call hosted by both companies, DBRS has determined that closing of the Transaction, as announced, will not impact the credit quality of ENB’s DBRS-rated subsidiaries (EIF, EPI, EGD and EEP) and has therefore confirmed these ratings.

POTENTIAL IMPACT ON ENB
DBRS believes that the Transaction, as proposed, before considering the potential sale of non-core assets, will be neutral for ENB’s overall business risk profile.
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With respect to the financial risk profile, ENB stated that it expects to fund future growth in a manner that is consistent with maintaining a strong investment-grade credit profile with key target metrics of 15% funds from operations (FFO) to debt and five times debt-to-EBITDA, which DBRS views as falling well within the financial parameters of the existing rating and likely to be achieved in late 2018 or early 2019.
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Consequently, DBRS expects to confirm all of ENB’s ratings with Stable trends in the event that the Transaction closes as contemplated. This expectation is based on a number of key DBRS assumptions, including no new material debt at the ENB level (aside from potential migration of Spectra Capital’s long-term debt to ENB over time) as a result of the Transaction, migration of the combined entity’s common dividend payout ratio towards the low end of the 50% to 60% range over the medium term, achievement of the contemplated improvement in credit metrics over the current planning period and no increase in structural subordination at the ENB level from currently contemplated levels. Changes to any of these, and other, key assumptions would cause DBRS to revisit the current ratings.

In addition:

DBRS Limited (DBRS) has today confirmed the ratings of Spectra Energy Capital, LLC (Spectra or the Company), Westcoast Energy Inc. (Westcoast), Union Gas Limited (Union Gas), Maritimes & Northeast Pipeline Limited Partnership (M&NP) and Express Pipeline Limited Partnership & Express Pipeline LLC (Express) with Stable trends. This rating action removes the ratings from Under Review with Developing Implications under which they were placed on September 6, 2016, as follows:
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— Westcoast, First Preferred Shares – cumulative, redeemable rated Pfd-2 (low)
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DBRS has determined that the Transaction will not impact the credit quality of Spectra and its DBRS-rated subsidiaries (Westcoast, Union Gas, M&NP and Express). DBRS notes that there are no changes contemplated to Spectra, its subsidiaries and counterparties, as a result of the Transaction. As announced, the financing for the Transaction is expected to be at the Enbridge Inc. level with no incremental borrowing at the Spectra entities. As a result, DBRS views the overall impact of the Transaction, as announced, on the stand-alone credit profiles of Spectra and its DBRS-rated subsidiaries as neutral and has therefore confirmed the ratings.

Affected issues are:

ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T, ENB.PR.Y

W.PR.H, W.PR.J, W.PR.K

Brompton Group has announced:

Dividend Growth Split Corp. (the “Company”) is pleased to announce it is undertaking a treasury offering of class A and preferred shares. The final class A and preferred share offering prices will be determined so as to be non-dilutive to the net asset value per unit of the Company as of the pricing date, as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.
The Company invests in a portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc.	The Bank of Nova Scotia	CI Financial Corp.
Shaw Communications Inc.	Industrial Alliance Insurance and Financial Services Inc.	Canadian Imperial Bank of Commerce
IGM Financial Inc.	TELUS Corporation	Manulife Financial Corporation
National Bank of Canada	Power Corporation of Canada	Canadian Utilities Limited
Sun Life Financial Inc.	Royal Bank of Canada	BCE Inc.
Enbridge Inc.	Bank of Montreal	The Toronto-Dominion Bank
Rogers Communications Inc.	TransCanada Corporation

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 per class A share and to provide the opportunity for growth in the net asset value per class A share.
The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.13125 per preferred share, representing a yield on the original issue price of 5.25% per annum, and to return the original issue price to holders of preferred shares on the Company’s maturity date (November 28, 2019).

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC and Scotiabank and includes TD Securities Inc. BMO Capital Markets, National Bank Financial Inc., GMP Securities L.P., Canaccord Genuity Corp., Desjardins Securities Inc., Raymond James Ltd., Echelon Wealth Partners Inc., Haywood Securities Inc., Industrial Alliance Securities Inc. and Mackie Research Capital Corporation.

Update, 2016-9-10: Priced and sized:

Dividend Growth Split Corp. (the “Company”) is pleased to announce that the Company’s treasury offering of class A and preferred shares has been priced at $6.75 per class A share and $10.25 per preferred share. The final class A and preferred share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company, as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering, and voluntary payment of certain costs of the offering by the Manager. Gross proceeds of the offering are expected to be approximately $25 million.

Enbridge Inc. has announced:

Highlights:

• •Creates largest energy infrastructure company in North America with C$1651 billion (US$127 billion) enterprise value
• •Anticipated 15 percent annualized dividend increase in 2017 and annual 10-12 percent dividend growth thereafter through 2024. Industry leading secured project and risked development inventory of C$74 billion (US$57 billion) with C$26 billion (US$20 billion) currently in execution
• •Complementary and diversified asset base to increase customer service offerings and optionality
• •Enhanced ability to pursue projects that will improve customer access and service
• •Strengthens investment grade balance sheet
• •96 percent of cash flow generated by cost-of-service, take-or-pay, or fee-based contracts
• •Industry-leading total return potential

Enbridge Inc. (TSX:ENB) (NYSE:ENB) (Enbridge) and Spectra Energy Corp (NYSE:SE) (Spectra Energy) today announced that they have entered into a definitive merger agreement under which Enbridge and Spectra Energy will combine in a stock-for-stock merger transaction (the “Transaction”), which values Spectra Energy common stock at approximately C$37 billion (US$28 billion), based on the closing price of Enbridge’s common shares on September 2, 2016. The combination will create the largest energy infrastructure company in North America and one of the largest globally based on a pro-forma enterprise value of approximately C$165 billion (US$127 billion). The Transaction was unanimously approved by the Boards of Directors of both companies and is expected to close in the first quarter of 2017, subject to shareholder and certain regulatory approvals, and other customary conditions.

DBRS has announced that it:

has today placed all ratings of Enbridge Inc. (ENB), Enbridge Income Fund (EIF), Enbridge Pipelines Inc. (EPI), Enbridge Gas Distribution Inc. (EGD) and Enbridge Energy Partners, L.P. (EEP) Under Review with Developing Implications, as follows:
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ENB plans a 15% annualized dividend increase in 2017 and annual 10% to 12% dividend growth thereafter through 2024. This is expected to result in a common dividend payout of 50% to 60% of available cash flow from operations (ACFFO), compared with ENB’s current 50% target payout ratio. ENB also plans to divest of approximately $2 billion of non-core assets over the next 12 months to provide additional financial flexibility. Annual run-rate synergies of $540 million (USD 415 million) are expected, the majority of which is expected to be achieved in the latter part of 2018. In addition, approximately $260 million (USD 200 million) of tax savings are anticipated commencing in 2019. On a combined basis, ENB will have a secured project and risked development inventory of $74 billion (USD 56 billion) currently in execution, with a very strong contractual profile.

With respect to the financial risk profile, ENB stated that it expects to fund future growth in a manner that is consistent with maintaining a strong investment-grade credit profile with key target metrics of 15% funds from operations (FFO) to debt and five times debt-to-EBITDA. DBRS notes that both ENB and SEC have significant capex programs over the medium term, with ENB’s being back-end loaded and SEC’s being front-end loaded, with the combination smoothing out the overall pattern somewhat over the 2017 to 2019 period. DBRS expects near-term pressure on ENB’s credit metrics to continue as a result of assumption of SEC’s existing debt and the relatively high near-term capex ($12.9 billion in 2017), partly offset by issuance of substantial common equity. Execution risk with respect to generating expected proceeds from the proposed asset sales is also present.

Spectra’s subsidiary Westcoast got a passing mention from DBRS:

DBRS Limited (DBRS) has today placed the ratings of Spectra Energy Capital, LLC (Spectra Capital, or the Company) and the ratings of the Company’s DBRS-rated subsidiaries Under Review with Developing Implications. The entities covered under this rating action are:
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— Westcoast Energy Inc., First Preferred Shares – cumulative, redeemable rated Pfd-2 (low)
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DBRS will further review the potential impacts of the Transaction on Spectra Capital’s ratings and the ratings of Company’s DBRS-rated subsidiaries, with an aim to resolve the Under Review – Developing Implications status.

S&P took a more cheerful view:

• •Diversified energy companies Spectra Energy Corp. and Enbridge Inc. have announced an agreement whereby Enbridge will acquire Spectra in a stock-for-stock merger transaction totaling C$37 billion (US$28 billion). The combined company will be the largest energy company in North America and one of the top five global energy companies based on a pro forma enterprise value of about C$165 billion (US$127 billion).
• •We are placing our ratings on Spectra and its financing subsidiary Spectra Energy Capital LLC.on CreditWatch with positive implications.
• •At the same time, we placed the ratings on master limited partnership Spectra Energy Partners LP and operating subsidiary Texas Eastern Transmission L.P. on CreditWatch with positive implications.
• •We expect to resolve the CreditWatch listing when the transaction closes sometime in the first quarter of 2017, at which time we expect to raise the rating on Spectra Energy Corp. and Spectra Energy Partners and Texas Eastern one notch to ‘BBB+’, which is in line with consolidated group credit profile of Enbridge Inc.

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“The CreditWatch listing on Spectra and its operating subsidiaries reflect our expectation that we will raise the ratings in line with those of Enbridge Inc.,” S&P Global Ratings analyst Michael Grande said. “Spectra will become a wholly owned subsidiary of Enbridge, and we expect Spectra’s 2017 consolidated EBITDA of about US$3.2 billion will account for about 40% of the combined company’s pro forma cash flow.”

… and, with respect to Westcoast:

• •On Sept. 6, Enbridge Inc. announced a merger with Spectra Energy Corp. in a share exchange transaction. When the merger’s completed, Spectra subsidiary Westcoast Energy Inc. will become a wholly owned subsidiary of Enbridge Inc.
• •We are placing our ratings, including our ‘BBB’ long-term corporate credit rating, on CreditWatch with positive implications.
• •The CreditWatch placement reflects our view that once completed, Westcoast Energy could be considered core to Enbridge Inc., which would lift the rating.

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“The transaction would introduce group support from Enbridge, currently a higher rated entity than existing parent Spectra Energy,” said S&P Global
Ratings credit analyst Gerald Hannochko.

The CreditWatch placement reflects our view that if the transaction closes as expected, Westcoast would likely become core to Enbridge Inc., and the rating and outlook would be equalized with those on Enbridge Inc.

An upgrade is likely if the transaction is completed, and if we assess Westcoast’s group status as core.

Part of the apparent disagreement is that S&P rates Enbridge preferreds as P-2(low) and Westcoast as P-3(high), inverting the ranking of DBRS, which has Enbridge at Pfd-3(high) and Westcoast at Pfd-2(low). Credit ratings are not an exact science!

Affected issues are:

ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T, ENB.PR.Y

W.PR.H, W.PR.J, W.PR.K

Update, 2016-9-7: Moody’s affirms Ba1 Preferred rating and maintains negative outlook:

Moody’s Investors Service has affirmed the Baa2 senior unsecured ratings for Enbridge Inc. (Enbridge) and its subsidiaries Enbridge Income Fund (EIF) and Enbridge Energy Limited Partnership (EELP).
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“The transaction is credit positive for Enbridge because Spectra brings increased size and scale, and helps create the largest midstream company in North America with a more diverse asset portfolio,” said Gavin MacFarlane, Moody’s Vice President — Senior Credit Officer. “But the company’s combined leverage remains elevated. We are maintaining a negative rating outlook for Enbridge until we see the company execute the transaction, the large capital program in 2017 and deleveraging plans.”
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Moody’s maintains a negative rating outlook for Enbridge based on the company’s very high levels of leverage. As of June 2016, Enbridge’s ratio of debt-to-EBITDA was 7.2x, while Spectra’s was about 5.8x and on a combined last twelve months basis their leverage was about 6.7x. The higher combined leverage is owing to the larger size of Enbridge relative to Spectra, as Spectra accounts for roughly 40% of the combined entities’ EBITDA. Moody’s continues to expect the financial metrics of both companies to improve as they progress with their capital programs. At the same time, Enbridge has announced $2 billion of asset monetizations that Moody’s expects will incrementally reduce leverage at ENB. Moody’s views the prospect of asset monetizations as credit positive and considers this as a meaningful change from a financial strategy perspective, as this represents the first time this decade that management has sought to sell assets out of the group to fund its capital program. The combination of the two entities provides more levers for management to pull in order to manage pressure on credit quality.

The negative outlook on ENB reflects its high leverage and execution risk associated with its plan to delever in a timely fashion. ENB has a plan to do so by the end of 2017 and a number of options at its disposal to reduce leverage. However, if the company fails to execute and debt-to-EBITDA of about 5.5x is unlikely to be achieved by the end of FY2017, the company could be downgraded.

Canaccord Genuity Group Inc. has announced (although not yet on their website):

the applicable dividend rates for its Cumulative 5-Year Rate Reset First Preferred Shares, Series A (the “Series A Preferred Shares”) and its Cumulative Floating Rate First Preferred Shares, Series B (the “Series B Preferred Shares”), further to its press release dated August 12, 2016 announcing that it does not intend to exercise its right to redeem all or any part of the currently outstanding Series A Preferred Shares and, as a result of which, subject to certain conditions, the holders of the Series A Preferred Shares have the right to convert all or any part of their Series A Preferred Shares into Series B Preferred Shares on a one-for-one basis.

With respect to any Series A Preferred Shares that remain outstanding after September 30, 2016, holders thereof will be entitled to receive quarterly fixed, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors of the Company, subject to the provisions of the Business Corporations Act (British Columbia). The dividend rate for the five-year period commencing on October 1, 2016 and ending on and including September 30, 2021 will be 3.885% per annum, being equal to the sum of the five year Government of Canada bond yield determined as of today, plus 3.21%, in accordance with the terms of the Series A Preferred Shares.

With respect to any Series B Preferred Shares that may be issued on September 30, 2016, holders thereof will be entitled to receive quarterly floating rate, cumulative, preferential cash dividends, if, as and when declared by the Board of Directors of the Company, subject to the provisions of the Business Corporations Act (British Columbia). The dividend rate for the three-month period commencing on October 1, 2016 and ending on and including December 31, 2016 will be 3.722% per annum, being equal to the sum of the three-month Government of Canada Treasury Bill yield determined as of today, plus 3.21% (calculated on the basis of the actual number of days elapsed during such quarterly period divided by 365), in accordance with the terms of the Series B Preferred Shares. The quarterly floating dividend rate will be reset every quarter.

Beneficial owners of Series A Preferred Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to ensure their instructions are followed for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on September 15, 2016.

The previous notice of extension was reported on PrefBlog.

CF.PR.A is a 5.50%+321 FixedReset that commenced trading 2011-6-23 after being announced 2011-6-6. The reset therefore represents a 29% dividend cut.

As noted, the deadline for notifying the company of a desire to convert is 5:00 p.m. (Toronto time) on September 15, 2016, but note that custodians of your shares will have internal deadlines a day or two earlier. Hence, I will make a recommendation on whether or not to convert on September 12, 2016.