Business context and reporting period
Enbridge Inc. reported results for the three months ended March 31, 2018. Amounts are in Canadian dollars unless otherwise noted. The business operates across liquids pipelines, gas transmission and midstream, gas distribution, green power and transmission, and energy services. The prior-year comparison is affected by the February 2017 Spectra Energy merger, so 2017 did not include a full comparable period for all acquired operations.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $12.726 billion | $11.146 billion |
| Operating income | $878 million | $1.358 billion |
| Earnings | $510 million | $945 million |
| Earnings attributable to common shareholders | $445 million | $638 million |
| Basic and diluted EPS | $0.26 | $0.54 |
| Cash provided by operating activities | $3.194 billion | $1.776 billion |
| Capital expenditures (cash-flow statement) | $1.635 billion | $1.642 billion |
| Cash and restricted cash at period end | $723 million | $1.194 billion |
- Revenue increased about 14%, while common-share earnings declined about 30%. Operating income included $1.062 billion of asset impairment charges.
- Operating cash flow rose by $1.418 billion year over year, driven largely by acquired businesses and distributions from long-term investments. Operating cash flow less capital expenditures was approximately $1.559 billion; this is a simple calculation, not a company-defined measure.
- Segment EBITDA was $1.917 billion versus $2.301 billion. Liquids Pipelines contributed $1.156 billion; Gas Transmission and Midstream $126 million; Gas Distribution $636 million; Green Power and Transmission $109 million; and Energy Services $169 million. The filing notes a change in segment profit measure to EBITDA effective year-end 2017.
- At March 31, total assets were $163.494 billion. Long-term debt was $61.191 billion, with $4.152 billion current portion and $1.004 billion of short-term borrowings. Debt capitalization was 48.2%, versus 48.3% at December 31, 2017.
- Available committed credit facilities were $11.075 billion; net available liquidity, including $610 million unrestricted cash, was $11.685 billion. The company reported compliance with debt covenants and sufficient liquidity to fund anticipated needs for approximately one year without capital-market access.
- The declared common dividend was $0.671 per share for the quarter, payable June 1, 2018. Common dividends paid in cash during Q1 were $764 million; an additional $374 million was reinvested through the dividend reinvestment plan.
Material changes versus the prior comparable period
- Management said merger-related acquired assets contributed approximately $364 million to common-share earnings in Q1 2018. After considering this contribution and unusual items, management attributed the remaining increase of $336 million primarily to stronger Liquids Pipelines results and higher Gas Distribution earnings.
- Reported earnings were burdened by a $913 million Midcoast impairment, a $144 million Line 10 impairment, and a non-cash unrealized derivative fair-value loss of $277 million, compared with a $416 million gain in Q1 2017. The filing reports after-tax amounts attributable to Enbridge of $701 million, $85 million, and $146 million, respectively.
- Employee severance, transition and transformation costs were $97 million, compared with $129 million in Q1 2017. The prior-year period also included $152 million of merger transaction costs, absent in 2018.
- Cash used in investing fell to $2.068 billion from $3.448 billion, principally because Q1 2017 included a $2.0 billion Bakken Pipeline System investment. Cash used in financing was $1.009 billion, versus $1.313 billion provided in the prior-year quarter, reflecting debt repayments and other financing activity.
- Foreign currency translation contributed $1.579 billion to other comprehensive income in Q1 2018, compared with $432 million in Q1 2017; this non-cash item helped lift comprehensive income to $1.983 billion.
Outlook, management commentary, risks and unusual items
- The filing does not provide a specific numerical earnings or EPS forecast. Management describes expected performance, cash flows, project costs, in-service dates, dividend expectations, and its 2018–2020 strategic plan as forward-looking, subject to material assumptions and risks.
- Management expects the FERC policy change restricting income-tax allowances for certain MLP interstate pipelines to have no material consolidated impact on results or cash flows over 2018–2020. It cautions that the change and related market effects could reduce SEP and EEP access to capital on attractive terms; mitigation options remain under review.
- The U.S. Line 3 Replacement Program remained subject to Minnesota regulatory approval. An administrative law judge recommended approval only with an in-trench replacement route rather than Enbridge’s preferred route; the Minnesota Public Utilities Commission was expected to rule later in Q2 2018. The Canadian Line 3 project was under construction, with a targeted second-half 2019 in-service date.
- Valley Crossing Pipeline’s estimated cost increased to US$1.6 billion, about 12% above prior estimates, due to scope changes, reroutes and offshore weather delays. Several other large pipeline and renewable projects were under construction, with timing and cost dependent on approvals, construction conditions and other factors.
- Subsequent to quarter-end, Enbridge agreed to sell Midcoast for US$1.1 billion and to sell 49% interests in selected renewable assets for initial proceeds of $1.75 billion; both transactions were expected to close in Q3 2018, subject to approvals and customary conditions. The Midcoast sale price informed the Q1 impairment.
- Other reported unusual items included a $63 million after-tax gain attributable to Enbridge from the U.S. tax reform impact on Green Power and Transmission, and a $50 million after-tax gain related to allocation of income between Enbridge and EEP noncontrolling interests.
- Risks include regulatory and permitting outcomes, pipeline safety requirements, commodity and foreign-exchange movements, interest rates, construction costs and schedules, capital-market access, and uncertain tax positions. Management believes ordinary-course legal and regulatory matters will not materially affect consolidated financial position or results, but outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of the earnings decline reflects the Midcoast and Line 10 impairments and derivative mark-to-market volatility, versus underlying operating performance.
- The Minnesota regulator’s decision on the U.S. Line 3 route and the implications for project schedule, cost and cost recovery.
- Whether the Midcoast and renewable-asset dispositions close on expected terms, and how proceeds are used to reduce debt or fund growth.
- Progress and cost performance across the major construction program, particularly Valley Crossing and Line 3.
- The ongoing effect of FERC’s MLP tax-allowance policy on SEP and EEP funding and cash distributions.
- How sustained capital spending, dividends and debt maturities affect leverage and liquidity; reported working capital was negative excluding current maturities of long-term debt.