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Enbridge's plan to lower leverage, refine focus earns quick praise

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Enbridge's plan to lower leverage, refine focus earns quick praise

Enbridge Inc.'s strategic plan earned positive reviews from Wall Street as stock rose and analysts lauded the North American midstream giant's tighter focus as it maps out a C$22 billion capital program and dividend increases.

Using noncore asset sales and equity issuances to fund the program, Enbridge will focus on regulated pipelines and utility businesses in addition to increasing dividends 10% and lowering Spectra Energy Partners LP's cost of capital by eliminating its incentive distribution rights, or IDRs. These payments require limited partnerships to pay a portion of their incremental quarterly cash distributions to the general partner, decreasing the amount of cash retained at the partnership level.

"The things we’re looking for — lower leverage, higher coverage and reduction of IDRs — all those boxes were checked in one form or another in one entity or another in this announcement," CBRE Clarion Securities' Hinds Howard told S&P Global Market Intelligence.

Despite institutional investors' hesitation toward midstream energy equity offerings, CFRA Research's Matthew Miller said Enbridge's planned C$1.5 billion issuance is a step in the right direction. "It provides much-needed clarity around the Spectra integration," he said. Enbridge acquired Spectra Energy Corp in February.

Enbridge shares rose 5.8% on Nov. 30, to $37.71 ,while Spectra Energy Partners' stock gained 5.4%, to $40.92.

For 2018, Spectra Energy Partners expects to raise distributions 7% and anticipates distributable cash flow to be between $1.63 billion and $1.67 billion, the partnership stated in a separate Nov. 29 statement. It expects distribution growth of 4% to 6% annually in 2019 and 2020, but despite that "dampened" prediction, analysts at investment bank Tudor Pickering Holt & Co. said in a Nov. 30 note to clients that the IDR buyout could help improve that outlook.

One of biggest potential asset sales on the table is Spectra's 50% interest in DCP Midstream LP's general partner, they added. According to CBRE's Howard, joint venture partner Phillips 66, which owns the other half of the entity, is the most likely buyer in the event of a sale. "They've said several times that they’d like to own the rest of it," he said. "They'd like to be more of a midstream player than just a pure refiner."

With $4.5 billion in projects placed into service in 2017 and planned to come online in 2018 and 2019, Spectra Energy Partners' growth plans feature both the Nexus and Atlantic Bridge gas pipelines, currently under construction.

Enbridge Energy Partners LP, meanwhile, expects higher contracted volumes on the Bakken pipeline system and higher toll surcharges on its 25% interest in the Mainline expansion project to grow cash flows over the next three years following the partnership's reorganization as a pure-play liquids pipeline master limited partnership.

The partnership's units soared 8.7% on Nov. 3. The Alerian MLP Index, which tracks major North American midstream energy companies, gained 4.1%.