Enbridge Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited interim results prepared under US GAAP. Amounts are Canadian dollars unless stated otherwise. Comparisons are with Q1 2022.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $12.075 billion | $15.097 billion | Down 20% |
| Operating income | $2.662 billion | $2.420 billion | Up 10% |
| Earnings | $1.866 billion | $2.057 billion | Down 9% |
| Earnings attributable to common shareholders | $1.733 billion | $1.927 billion | Down 10% |
| Basic / diluted earnings per share | $0.86 / $0.85 | $0.95 / $0.95 | Down |
| EBITDA, company-reported non-GAAP measure | $4.427 billion | $4.424 billion | Essentially flat |
| Operating cash flow | $3.866 billion | $2.939 billion | Up 32% |
| Capital expenditures | $1.129 billion | $1.048 billion | Up |
Revenue fell mainly because commodity sales declined to $4.783 billion from $8.325 billion, alongside lower commodity costs. Operating margin was approximately 22.0% versus 16.0%; net margin was approximately 15.4% versus 13.6%. These ratios are calculated from reported revenue and earnings.
Operating cash flow improved substantially, with a $914 million favorable change in operating assets and liabilities versus a $177 million use of cash in Q1 2022. Investing activities used $1.437 billion; financing activities used $2.289 billion. Cash and restricted cash ended the quarter at $1.051 billion.
At March 31, 2023, total assets were $177.070 billion, long-term debt was $71.740 billion, current long-term debt was $7.436 billion, and short-term borrowings were $1.437 billion. Net available liquidity was $12.6 billion, including $11.6 billion of available committed credit facilities and $976 million of unrestricted cash. Enbridge reported compliance with debt covenants. Common dividends paid were $0.888 per share; the quarterly rate was increased 3.2% to $0.8875 effective March 1, 2023.
Material changes and segment results
- Reported common earnings were affected by a $638 million realized loss on termination of Canadian Mainline foreign-exchange hedges, primarily reflecting changed settlement terms. Management cited $215 million of net negative impact from infrequent or other non-operating factors overall. Non-cash derivative fair-value gains and losses also contributed to reported earnings volatility.
- EBITDA increased in Liquids Pipelines to $2.363 billion from $2.329 billion, Gas Transmission and Midstream to $1.205 billion from $1.014 billion, and Gas Distribution and Storage to $716 million from $665 million. Renewable Power Generation EBITDA declined to $136 million from $162 million. Energy Services moved to $1 million from a $101 million loss. Eliminations and Other fell to $6 million from $355 million.
- Management attributed pipeline gains to higher volumes, acquisitions of interests in Gray Oak and Cactus II, and Mainline activity; Gas Transmission and Midstream benefited from Texas Eastern rate-settlement revenues. Gas Distribution and Storage results included a favorable $63 million timing effect expected to reverse during 2023, while warmer-than-normal weather negatively affected year-over-year results by approximately $63 million.
Outlook, developments and risks
- Enbridge reached an agreement in principle with Mainline shippers for a 7.5-year toll settlement through 2028, subject to regulatory and other approvals. New interim tolls were expected to begin July 1, 2023. Management said the expected financial outcome was in line with previously reported results after considering the prior provision, inflation adjustments and higher volumes.
- The company stated its current financing plan does not include additional common-equity issuance and expects liquidity to cover anticipated requirements for approximately one year without capital-market access, subject to conditions. It reported less than 5% of debt exposed to floating rates after hedging.
- In March, Enbridge issued US$3.0 billion of notes, including US$2.3 billion of 5.70% sustainability-linked notes due 2033 and US$700 million of 5.97% notes due 2026. The sustainability-linked notes carry a 50-basis-point rate increase if the stated 2030 emissions-intensity target is not met. The company redeemed US$600 million of subordinated notes on April 15, 2023.
- After quarter-end, Enbridge acquired Tres Palacios natural gas storage for US$335 million. It also announced an agreement to acquire interests in Aitken Creek storage for $400 million plus specified adjustments; closing was expected later in 2023, subject to approvals and conditions.
- Key uncertainties include regulatory approval and final toll adjustments for the Mainline settlement; rate proceedings; market, foreign-exchange, interest-rate and commodity-price movements; project costs and timing; and litigation. The Michigan Line 5 easement case remained in progress, and the Army Corps expected to complete the DAPL draft environmental impact statement in spring 2023. Management said ordinary-course litigation was not expected to materially affect financial position or results, but outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether the Mainline toll settlement receives required approvals and how its final terms affect earnings and cash flow.
- How much of the quarter’s cash-flow increase reflects working-capital timing, and whether the Gas Distribution timing benefit reverses as expected.
- Debt maturities, refinancing costs, liquidity availability and the effect of interest rates on financing needs.
- Progress, purchase economics and regulatory conditions for Tres Palacios and Aitken Creek, and delivery of secured growth projects.
- Developments in Line 5, DAPL, and other regulatory or legal proceedings, as well as market-driven changes to derivative valuations.