Enbridge Inc. EQUITY RESEARCH DAILY EDGE. Goodbye Sandpiper... Hello Bakken Pipeline System. Wednesday, August 3, 2016, Intraday Flash

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1 Enbridge Inc. Goodbye Sandpiper... Hello Bakken Pipeline System OUR TAKE: Enbridge Inc. (ENB) and its MLP sponsored vehicle, Enbridge Energy Partners (EEP-N), announced a 27.6% investment in the Bakken Pipeline System (BPS) for US$1.5B. We expect this will result in its US$2.6B Sandpiper project being shelved. Given EEP's funding constraints, we expect ENB will own the majority of the BPS ownership interest. We see this as a slight positive for Enbridge given increased near-term earnings and improved ability to cost-effectively handle additional oil sands volumes in the future. KEY POINTS Enbridge Inc. rather than EEP could largely own BPS. To fund the transaction, ENB has extended EEP a US$1.5B credit facility. In addition, the companies are evaluating a joint funding arrangement that could see ENB take a material stake in the project (up to 75% of EEP's interest based on past projects). This would lessen the capital raising requirements of EEP, which has been an overhang on the share price, as well as improve the accretion for ENB. ENB expects the transaction will be funded through existing liquidity. ANALYST TEAM ENERGY INFRASTRUCTURE Robert Hope, CFA Analyst Scotia Capital Inc. - Canada Arnav Gupta Associate Scotia Capital Inc. - Canada PERTINENT DATA Rating 1-Yr. Target ENB-T ENB-N Sector Outperform C$61.00 C$52.94 US$ Yr. Return 19.5% Div. (NTM) $2.27 Div. (Curr.) $2.12 Yield (Curr.) 4.0% Valuation: Discounted cash flow analysis using 5% WACC PERTINENT REVISIONS New Old Adj EPS17E $2.56 $2.53 Adj EPS18E $2.81 $2.77 Downstream de-bottlenecked? A benefit of this transaction could be that it will improve the balance of Enbridge's pipeline system and relieve congestion south of Superior. This is a result of the Bakken Pipeline System by-passing Enbridge's legacy network and instead moving Bakken barrels to Patoka (Exhibit 1). This could further defer the need for Enbridge's Line 61 to be twinned (Superior to Flanagan), a project which could have cost US$3.5-$4.5B. We believe this could improve the positioning of further expansions of Enbridge's Mainline system to accommodate future volumes from the oil sands of up to 800 kbpd. Higher near-term earnings. We have updated our estimates to reflect BPS as well as the shelving of Sandpiper. We assume that of the 27.6% interest in BPS, Enbridge represents 75% of this amount and EEP 25%, which is consistent with recently funded joint projects. The net result is higher EPS estimates by $0.03-$0.04. Our 2019 and beyond estimates are roughly unchanged as Enbridge will have a higher proportionate interest in the smaller BPS project versus the larger Sandpiper project that was to enter service in We see the transaction as lowering the overall amount of capital required to be raised by Enbridge and its affiliates, though it does alter the profile with a higher amount in the near term. We continue to assume $400M of ENB common equity issuances in each of 2017 and Qtly Adj EPS (FD) Q1 Q2 Q3 Q4 Year Price/Adj. EPS 2015A $0.55 $0.59 $0.46 $0.57 $ x 2016E $0.75A $0.49A $0.48 $0.58 $ x 2017E $ x 2018E $ x (FY-Dec.) 2014A 2015A 2016E 2017E 2018E FCFPS $3.03 $3.72 $4.11 $4.45 $4.67 Price/FCF 19.7x 12.4x 12.9x 11.9x 11.3x Payout Ratio 46.2% 49.9% 51.6% 54.3% 59.0% EBITDA (M) $4,986 $6,180 $7,036 $7,752 $8,246 Net Debt/EBITDA 7.0x 6.7x 5.8x 5.6x 5.2x Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated. Source: FactSet; company reports; Scotiabank GBM estimates. Time of dissemination: August 03, 2016, 13:49 ET. CAPITALIZATION Market Cap. (M) $49,458 Net Debt + Pref. (M) $59,079 Enterprise Value (M) $108,537 Shares O/S (M) 934 Float O/S (M) 933 Volume and Closing Price for ENB-T Oct-15 Volume For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-u.s. affiliates are not registered/qualified as research analysts with FINRA in the U.S. Vol (M) Source: FactSet. Dec-15 Feb-16 Apr-16 Jun Price (CAD) 35 Aug-16 ENB-T 1

2 Bakken Pipeline System Overview Bakken Pipeline System (BPS) overview. BPS is a pipeline system being developed by Energy Transfer Partners (ETP-N), Sunoco Logistics Partners (SXL-N) and Phillips 66 (PSX-N). It involves 1) the US$3.8B Dakota Access Pipeline that will move Bakken barrels from North Dakota to Patoka, as well as 2) the US$1B Energy Transfer Crude Oil Pipeline (ETCO) that involves some new build but largely the conversion of a natural gas pipeline to oil service, allowing barrels to flow from Patoka to Nederland, Texas. These projects are under construction and expected to enter service late ETP is in charge of the construction of the project while SXL will operate the systems once they enter service. We see the project as largely funded and do not expect Enbridge to invest any material amount of capital beyond the initial US$1.5B. Buying in at a reasonable premium. EEP could have an effective 27.6% interest in BPS for an upfront purchase price of US$1.5B. Its future construction costs should be relatively small as the transaction is expected to close in Q3/16 and the pipeline is expected to enter service in Q4/16. EEP's purchase price implies a total project value of US$5.4B, versus the expected construction cost of US$4.8B. We would consider this premium to be fair. Likely shelving Sandpiper. Upon closing of the transaction, Marathon Petroleum and EEP will terminate their agreement regarding the Sandpiper pipeline. While EEP noted that it will evaluate the scope and timing of Sandpiper during the quarter, we believe this announcement effectively shelves the project. The volume outlook for the Bakken has deteriorated since these projects were announced and we do not see the need for two new greenfield pipelines in the near term. As a reminder, Sandpiper is a US$2.6B greenfield pipeline that would transport oil from the North Dakota Bakken to Superior, Minnesota. The 225 kbpd project was to cost US$2.6B and be 37.5% financed by Marathon. Upon completion, EEP would have owned 73% of the project with Marathon owning the remaining 27%. At the end of Q2/16, US$0.8B had been spent on the project, with EEP s share at US$0.5B. We do not expect to see any meaningful recovery of these costs. 2

3 Exhibit 1: Bakken Pipeline System Map Source: Company reports. 3

4 Exhibit 2: Coverage Overview Rating Target Price Market Dividend ROR P/E FCF Yield EV/EBITDA 08/02/2016 Cap ($B) Annual Yield 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Pipelines Enbridge SO $61.00 $52.94 $49.5 $ % 19.2% 23.1x 20.6x 18.9x 7.8% 8.4% 8.8% 15.4x 14.0x 13.2x Enbridge Income Fund SO $37.00 $32.51 $4.0 $ % 19.6% 14.9x 13.4x 12.3x 7.2% 7.4% 7.8% n.m.f. n.m.f. n.m.f. TransCanada SO $68.00 $60.71 $48.5 $ % 15.9% 24.1x 22.3x 19.6x 7.5% 8.7% 9.6% 16.0x 14.2x 12.3x Average 4.5% 20.7x 18.8x 16.9x 7.5% 8.2% 8.7% 15.7x 14.1x 12.7x Midstream AltaGas SP $33.00 $32.89 $5.4 $ % 6.5% 36.2x 32.8x 28.5x 6.8% 7.5% 8.0% 14.4x 13.6x 12.7x Gibson SP $17.00 $14.70 $2.1 $ % 24.6% n.m.f. 27.0x 19.2x 7.6% 12.7% 13.7% 10.7x 7.8x 7.1x Inter Pipeline SP $27.00 $27.06 $9.1 $ % 5.6% 20.9x 20.6x 20.1x 7.9% 7.8% 7.8% 14.4x 14.3x 14.2x Keyera SP $40.00 $37.82 $6.9 $ % 9.8% n.m.f. 23.3x 21.1x 6.5% 7.3% 7.7% 12.9x 11.5x 10.2x Pembina SO $44.00 $37.83 $14.6 $ % 21.3% n.m.f. 23.7x 21.7x 6.2% 7.4% 8.3% 16.3x 12.7x 10.9x Tidewater SO $1.75 $1.33 $0.4 $ % 34.6% 21.3x 16.2x 13.7x 8.6% 12.2% 10.3% 8.9x 6.8x 6.1x Veresen SP $11.00 $10.80 $3.3 $ % 11.1% 49.7x 33.8x 29.5x 9.6% 9.7% 9.8% 13.7x 11.6x 10.2x Average 6.0% 35.5x 24.6x 21.7x 7.6% 9.2% 9.4% 13.1x 11.2x 10.2x Power Capital Power SU $18.50 $21.17 $2.0 $ % -5.2% 18.5x 22.3x 24.3x 15.6% 13.5% 13.6% 8.4x 8.8x 8.9x TransAlta SU $6.50 $6.08 $1.8 $ % 9.5% n.m.f. n.m.f. n.m.f. 13.8% 15.6% 15.7% 7.8x 7.5x 7.5x TransAlta Renewables SP $13.50 $14.05 $3.3 $ % 2.4% 22.2x 17.0x 15.4x 7.8% 7.9% 8.5% 12.0x 10.6x 9.6x Average 5.5% 20.4x 19.6x 19.9x 12.4% 12.3% 12.6% 9.4x 9.0x 8.7x Utilities Algonquin SO $13.00 $12.17 $3.3 $ % 11.3% 24.7x 20.3x 17.0x 5.6% 7.1% 8.5% 12.3x 12.2x 9.9x Emera SP $49.00 $49.18 $7.3 $ % 3.6% 20.0x 18.4x 16.6x 6.0% 6.9% 7.5% 14.0x 10.4x 9.8x Fortis SO $48.00 $42.94 $12.2 $ % 15.3% 19.6x 17.0x 16.4x 6.2% 6.5% 6.7% 11.6x 10.8x 10.6x Hydro One SP $24.50 $26.00 $15.5 $ % (2.5%) 22.2x 20.3x 19.3x 5.4% 6.1% 6.5% 12.9x 11.9x 11.3x Average 3.8% 21.6x 19.0x 17.3x 5.8% 6.7% 7.3% 12.7x 11.3x 10.4x Source: Company reports; Factset; Scotiabank GBM estimates. 4

5 Exhibit 3: Summary Model Enbridge - Trading Stats Year-end Dec. 31 Recent Price $/shr Dividend $/shr 2.12 Shares O/S M Dividend Yield % 4.0% Market Cap $M 49,458 Net Debt & Other $M 59,079 EV $M 108,537 Key Metrics E 2017E 2018E Valuation & Ratios E 2017E 2018E Adj. EBITDA $M 6,180 7,036 7,752 8,246 EV/Adj. EBITDA x YoY Growth % 24% 14% 10% 6% P/E x Adj. EPS (diluted) $/shr FCF Yield % 7.0% 7.8% 8.4% 8.8% YoY Growth % 16% 6% 12% 9% Dividend Yield % 3.5% 4.0% 4.6% 5.2% FCF/shr $/shr YoY Growth % 23% 10% 8% 5% Net Debt to EBITDA x DPS $/shr Net Debt to Capitalization % 64% 61% 62% 60% YoY Growth % 33% 14% 14% 14% Payout Ratio (FCF) % 50% 52% 54% 59% Payout Ratio (EPS) % 84% 92% 93% 97% ROE % 26.6% 23.4% 22.0% 21.9% Income Statement E 2017E 2018E Quarterly Forecast 1Q/16 2Q/16 3Q/16E 4Q/16E Liquids Pipelines $M 3,384 4,063 4,533 4,882 Liquids Pipelines $M 1, ,017 1,040 Gas Distribution $M Gas Distribution $M Gas Pipelines & Processing $M Gas Pipelines & Processing $M Green Power & Transmission $M Green Power & Transmission $M Energy Services $M Energy Services $M Elimination & Other $M (246) (339) (340) (340) Elimination & Other $M (86) (83) (85) (85) Adjusted EBITDA $M 6,180 7,036 7,752 8,246 Adjusted EBITDA $M 1,933 1,644 1,674 1,784 Depreciation and Amortization $M 2,024 2,239 2,367 2,422 Depreciation and Amortization $M EBIT $M 4,156 4,796 5,385 5,824 EBIT $M 1,374 1,089 1,112 1,222 Net Interest Expense $M (1,273) (1,517) (1,592) (1,602) Income Tax $M (486) (590) (759) (844) EPS (diluted) $/shr NCI $M (243) (289) (314) (362) FCF/shr $/shr Other $M Preferred Share Dividends $M (288) (291) (291) (291) Adjusted Earnings $M 1,866 2,110 2,430 2,725 Adjustments $M 1,903 (705) 0 0 Reported Earnings $M (37) 2,815 2,430 2,725 Balance Sheet E 2017E 2018E Cash Flow Analysis E 2017E 2018E Cash $M 1, ,049 Cash from Operations $M 4,571 6,074 6,248 6,673 Other Current Assets $M 6,582 5,552 5,552 5,552 Cash from Investing $M (7,933) (8,851) (5,478) (4,655) Net PP&E $M 64,434 67,745 70,636 72,650 Cash from Financing $M 2,973 2,405 (547) (1,796) Other LT Assets $M 12,633 12,638 12,618 12,598 Adjustments due to FX $M 143 (38) 0 0 Total Assets $M 84,664 86,540 89,634 91,849 Change in Cash $M (246) (410) Short-term Debt $M 1,990 5,105 5,105 5,105 Capital Expenditure $M 7,273 5,769 5,258 4,435 Other Current Liabilities $M 8,824 8,483 8,483 8,483 LT Debt $M 39,540 36,898 37,898 37,898 Cash Flow from Cont. Ops. $M 5,259 5,865 6,248 6,673 Other LT Liabilities $M 11,971 11,811 12,418 13,051 Distributions to NCI $M (680) (691) (661) (664) Total Liabilities $M 62,325 62,297 63,904 64,537 Distributions to Redeemable NCI $M (114) (201) (259) (334) NCI $M 1, (193) (856) Preference Share Dividends $M (288) (291) (291) (291) Common Shareholders Equity $M 21,039 23,775 25,923 28,168 Maintenance Capital $M (720) (796) (851) (889) Total Liabilities & Equity $M 84,664 86,540 89,634 91,849 Adjustments $M (303) (144) 0 0 Free Cash Flow $M 3,154 3,743 4,187 4,496 Business Mix (Operating Earnings) E 2017E 2018E Liquids Pipelines % 77% 79% 79% 79% Gas Distribution % 10% 9% 9% 8% Gas Pipelines & Processing % 8% 7% 8% 8% Green Power & Transmission % 4% 4% 4% 4% Energy Services % 1% 1% 1% 1% Source: Company reports; Factset; Scotiabank GBM estimates. 5

6 Company Overview Company Description Enbridge Inc. (ENB) is a leading energy delivery company in North America. In Alberta s oil sands region, it is the largest pipeline operator in the Fort McMurray to Edmonton/Hardisty corridor. ENB owns Canada s largest natural gas distribution company, with more than 2 million customers, and has natural gas pipelines and processing operations onshore in both Canada and the United States. ENB has interests in more than 2,200 MW of renewable and alternative energy generating capacity in Canada and the United States. With its $34 billion commercially secured capital program, ENB continues to be one of the leading energy infrastructure companies in North America. Risks Key Risks: Interest rates; growth projects; commodity volumes Total Return Index of ENB-T Source: Scotiabank GBM; FactSet. 6

7 Appendix A: Important Disclosures Company Algonquin Power & Utilities Corp. AltaGas Ltd. Capital Power Corporation Emera Incorporated Enbridge Inc. Enbridge Income Fund Holdings Inc. Fortis Inc. Gibson Energy Inc. Hydro One Limited Inter Pipeline Ltd. Keyera Corp. Pembina Pipeline Corporation TransAlta Renewables Inc. TransCanada Corporation Veresen Inc. Disclosures (see legend below)* G, HH, I, U HH, I G, HH, I, O1, U I I I HH I, Robert Hope, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accurately reflect my personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by me in this report. This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst. All pricing of securities in reports is based on the closing price of the securities principal marketplace on the night before the publication date, unless otherwise explicitly stated. All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director and Co-Head, Global Capital Markets, who is not and does not report to the Head of the Investment Banking Department. Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public information across internal information barriers, such as between Investment Banking and Research. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets, and the revenues generated from its various departments, including investment banking, trading fees and other types of transactions. Furthermore, the research analyst s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with subject company, public appearances and trading securities held by the analysts. For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit gbm.scotiabank.com/ disclosures. Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1. Time of dissemination: August 03, 2016, 13:49 ET. *Legend G HH I O1 U Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months. The Head of Equity Research or a Supervisory Analyst owns securities of this issuer in his or her own account or in a related account. Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months. Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and outstanding equity securities of this issuer. Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer. 7

8 Rating and Price Target History Enbridge Inc. (ENB-T) as of August 02, 2016 (in CAD) 10-Sep-2013 Price: Target: Nov-2013 Price: Target: 54.00* 27-Nov-2013 Price: Target: 52.00* 10-Feb-2014 Price: Target: 55.00* 08-May-2014 Price: Target: 60.00* 23-Jul-2014 Price: Target: 66.00* 03-Sep-2014 Price: Target: 70.00* 01-Dec-2014 Price: Target: 65.00* 04-Dec-2014 Price: Target: 72.00* 20-Feb-2015 Price: Target: 74.00* 06-Nov-2015 Price: Target: 70.00* Price (CAD) 45 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul Dec-2015 Price: Rating: None Target: NA 04-Jul-2016 Price: Rating: I:SO Target: 61.00* *Represents the value(s) that changed. Scotiabank GBM Ratings Legend: FS=Focus Stock; SO=Sector Outperform; SP=Sector Perform; SU=Sector Underperform; T=Tender; UR=Under Review Powered by: BlueMatrix 8

9 Definition of Scotiabank, Global Banking and Markets Equity Research Ratings We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings Focus Stock (FS) The stock represents an analyst s best idea(s); stocks in this category are expected to significantly outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Outperform (SO) The stock is expected to outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Perform (SP) The stock is expected to perform approximately in line with the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Underperform (SU) The stock is expected to underperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Other Ratings Scotiabank, Global Banking and Markets Equity Research Ratings Distribution* Distribution by Ratings and Equity and Equity-Related Financings* 60% 40% 20% 0% 45.0% 48.1% 6.9% 12.9% 9.3% 0.2% Sector Outperform Sector Perform Sector Underperform * As of July 31, Source: Scotiabank GBM. EQUITY RESEARCH DAILY EDGE Tender Investors are guided to tender to the terms of the takeover offer. Under Review The rating has been temporarily placed under review, until sufficient information has been received and assessed by the analyst. Risk Ranking As of June 22, 2015, Scotiabank, Global Banking and Markets discontinued its Low, Medium, and High risk rankings. The Speculative risk ranking reflects exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, and exceptionally high stock volatility. The Director of Research and the Supervisory Analyst jointly make the final determination of the Speculative risk ranking. Percentage of companies covered by Scotiabank, Global Banking and Markets Equity Research within each rating category. Percentage of companies within each rating category for which Scotiabank, Global Banking and Markets has undertaken an underwriting liability or has provided advice for a fee within the last 12 months. For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than buy, hold/neutral and sell, to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively. 9

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