06/19/2015 07:46 EDT | Updated 06/19/2016 05:59 EDT

Enbridge to transfer pipeline business to affiliated fund in $30.4-billion deal

CALGARY - Enbridge Inc. (TSX:ENB) is transferring ownership of its Canadian liquids pipeline and renewable energy business to its subsidiary, Enbridge Income Fund Holdings Inc. (TSX:ENF), in a transaction valued at $30.4 billion.

Under the deal, Enbridge Inc. will get $18.7 billion more equity in the Income Fund, bringing its total stake in the subsidiary to roughly 90 per cent, while the Income Fund will also take on about $11.7 billion in debt from its parent company.

Enbridge Inc.'s CEO said in a conference call that the pipeline and renewable assets hadn't been properly valued while part of the larger Enbridge Inc. company.

"We spent a lot of time thinking about these value drivers and concluded that they weren't being reflected in our valuation relative to peers," said Al Monaco.

The deal will significantly increase the size and growth prospects for Enbridge Income Fund while also giving Enbridge Inc. more flexibility in raising money for future projects, according to AltaCorp Capital analyst Dirk Lever.

"For Enbridge Income Fund Holdings, it makes them a very very sizable mid-stream player. It's taken them from, in round numbers, $10 billion to $40 billion. So it's a huge transaction for them," said Lever in an interview.

Thanks to the growth prospects of the new assets, the Income Fund is expected to be able to raise its dividend by 10 per cent on closing, and a further 10 per cent every year through to 2019. That compares with a roughly one per cent annual increase in the past, except when Enbridge Inc. made smaller asset transfers to the subsidiary.

The move reflects a greater focus on increasing dividends, where Enbridge Inc. has already committed to increasing its dividend by 33 per cent this year and expects to increase it between 14 and 16 per cent annually from 2016 to 2018.

For Enbridge, the deal provides more options to raise money by issuing equity through the subsidiary, rather than dilute the main company's share count.

Already the Income Fund is expected to issue between $600 million and $800 million in equity a year through to 2018, bringing Enbridge Inc.'s share of the fund down to 80 per cent.

Enbridge had previously announced in December that it was considering this transaction, which requires approvals from ENF shareholders, the Competition Bureau, the Toronto Stock Exchange and Transport Canada.

It expects the transaction to close in August.

On the same day the deal was announced, Standard & Poor's dropped its rating of Enbridge Inc. from A- to BBB+, citing weak forecast financial metrics at the company. However the rating agency said the deal with Enbridge Income Fund did not change its assessment of business or financial risk.

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