Business context and reporting period
Enbridge Inc.’s Form 10-Q covers the quarter and six months ended June 30, 2019. The company operates liquids pipelines, gas transmission and midstream, gas distribution, renewable power generation and transmission, and energy services businesses. Figures are in Canadian dollars unless noted.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Operating revenue | $13.263 billion | $10.745 billion | $26.119 billion | $23.471 billion |
| Operating income | $2.285 billion | $1.571 billion | $4.904 billion | $2.449 billion |
| Earnings attributable to common shareholders | $1.736 billion | $1.071 billion | $3.627 billion | $1.516 billion |
| Diluted earnings per common share | $0.86 | $0.63 | $1.80 | $0.90 |
| EBITDA, as reported | $3.745 billion | $2.749 billion | $7.877 billion | $4.666 billion |
For the first six months, cash provided by operating activities was $4.670 billion, down from $6.538 billion; management attributed the decline primarily to changes in operating assets and liabilities. Investing activities used $3.457 billion, including $2.785 billion of capital expenditures. Financing activities used $1.058 billion, and cash and restricted cash ended the period at $767 million.
At June 30, 2019, long-term debt was $60.017 billion, with $4.644 billion of current maturities and $916 million of short-term borrowings. The debt capitalization ratio was 47.4%, versus 46.8% at year-end 2018. Net available liquidity was $6.316 billion; the company reported negative working capital excluding current maturities of long-term debt. It said it was in compliance with debt covenants. Common dividends declared were $0.738 per share quarterly; cash common dividends paid in the first half totaled $2.976 billion.
Material changes versus the prior comparable period
- Second-quarter common earnings rose to $1.736 billion from $1.071 billion; first-half common earnings rose to $3.627 billion from $1.516 billion. The year-over-year comparisons were materially affected by non-cash derivative fair-value movements and prior-year impairments and tax items.
- Management identified stronger liquids pipeline throughput, new gas transmission assets, higher gas distribution rates and customer growth, and improved Energy Services transportation margins as operating contributors. Sold gas gathering and processing businesses reduced year-over-year contributions.
- First-half operating cash flow fell despite higher earnings, principally reflecting working-capital movements. Debt capitalization increased from year-end.
- Reported revenue growth partly reflects higher commodity sales; commodity costs also increased. Accordingly, revenue growth alone does not indicate improved underlying profitability.
Outlook, commentary, risks and unusual items
- Management’s results discussion describes its growth program and funding plans, but this filing does not provide a clear quantified full-year earnings or EPS guidance value. On August 2, after quarter-end, Enbridge announced $2 billion of additional growth projects and a $19 billion inventory of secured projects expected to enter service from 2019 to 2023.
- The U.S. Line 3 Replacement Program faced a Minnesota environmental review and permitting setback. Enbridge said it could not determine when all permits would be issued; U.S. construction costs were above budget due to delays, and total program costs could exceed the $9 billion estimate depending on the in-service date.
- Reported earnings were substantially influenced by unrealized derivative gains and losses. In Q2, management cited a $695 million non-cash derivative fair-value gain in 2019 versus a $282 million loss in 2018, as well as a $138 million inventory write-down in 2019. For the first half, derivative fair-value gains, prior-year asset-sale impairments and severance comparisons were among material unusual items; inventory write-downs also weighed on 2019 results.
- On August 1, 2019, after the reporting date, a rupture on the Texas Eastern gas pipeline in Kentucky resulted in one confirmed fatality and a pipeline shutdown while the incident was investigated by the NTSB.
- Other material matters include litigation and regulatory uncertainty involving Line 5 in Michigan and on the Bad River Reservation, the Texas Eastern rate case, and project permitting. Management stated that ordinary-course legal matters were not expected to materially affect consolidated results, but outcomes remain uncertain.
- Enbridge highlighted exposure to foreign exchange, interest rates and commodity prices, and reliance on access to capital markets and credit facilities. It reported $2.4 billion of signed capital expenditure contracts expected to be paid over five years. Management said its financing plan did not require equity funding alternatives.
Important facts for investors to verify
- How much of earnings and EBITDA growth reflects operating performance versus derivative mark-to-market gains, prior-year impairments, tax effects and other unusual items.
- Cash conversion and working-capital trends, ongoing capital expenditure needs, dividend funding, and the level and cost of commercial paper and other borrowing.
- Updated Line 3 permitting, schedule and cost estimates, including whether costs exceed the stated $9 billion estimate.
- Operational, regulatory and financial consequences of the Texas Eastern rupture and the status of Line 5 and Texas Eastern rate proceedings.
- Progress, financing and expected in-service dates for the $19 billion secured project portfolio, and the outcome of pending asset dispositions.