Spectra Energy Partners, LP Note (SEP)

Spectra’s sponsor, Enbridge (ENB), announced a roll-up proposal in May 2018 to acquire the remaining interest in Spectra that it doesn’t currently own. If accepted, SEP unitholders will receive 1.0123 common shares of Enbridge per SEP unit, representing a value of about $32 per unit today.

As Enbridge laid out (see quote below), the deal was driven by U.S. tax reform and a recent regulatory change affecting how rates for certain MLPs such as Spectra will be treated in the future.

Spectra Energy Partners has stated that it does not expect a material financial impact as a result of the regulatory ruling announced in March 2018, which clearly conflicts with Enbridge’s statement below. SEP’s board of directors is currently reviewing Enbridge’s acquisition offer.

It’s hard to see much upside for SEP unitholders from here, particularly if Enbridge’s assessment of the situation is correct. As a result of these developments, SEP’s payout (and future as a standalone entity) appears to be on shakier ground, even despite the firm’s 42nd consecutive quarterly distribution increase announced in May 2018.

Here is part of Enbridge’s statement:

“The recent FERC income tax allowance policy reversal and the regulatory rate impact from the U.S. Tax Cuts and Jobs Act (TCJA), as well as the market reactions across the MLP landscape, have challenged the standalone viability of SEP, EEP and EEQ as reliable and cost effective sources of capital to support Enbridge’s growth…

Enbridge believes that both the direct consequences of the reversal in FERC policy, as well as the adverse market effects, have weakened SEP’s value proposition and have made it an ineffective and unreliable standalone financing vehicle to support Enbridge’s growth. These adverse impacts are compounded by the challenge SEP would face in mitigating the new FERC tax allowance policy while pursuing its regulatory and rate strategy. As a consequence, Enbridge believes that, on a standalone basis, SEP will face the cessation of distribution growth, and potential reductions in cash distribution to unitholders as early as 2019.

Enbridge believes the proposed transaction mitigates the significant risk SEP faces in its current MLP form as it advances its regulatory and rate case strategies. The proposed restructuring addresses the risk to the cessation of distribution growth or a potential reduction in SEP’s distributions. Additionally, Enbridge’s proposal offers SEP unitholders a security with enhanced trading liquidity and provides direct ownership in North America’s largest energy infrastructure company with diverse, safe and reliable cash flow generation supporting attractive dividend growth.

Under today’s restructuring proposal:

• SEP unitholders will receive 1.0123 common shares of Enbridge per SEP unit, representing a value of US$33.10 per SEP unit based on the closing price of Enbridge common shares on the NYSE on May 16, 2018; equivalent to the closing price of SEP’s common units on the NYSE on such date.
• Enbridge believes that the proposed exchange ratio for SEP reflects an appropriate value for SEP units based on its stand-alone value.
• The proposed merger transaction will be subject to the approval of holders of a majority of the outstanding SEP common units.”