Enbridge Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unless noted, amounts are Canadian dollars. Enbridge operates Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution and Storage, Renewable Power Generation, and Energy Services.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $13.215 billion | $10.948 billion | $28.312 billion | $23.085 billion |
| Operating income | $1.520 billion | $1.816 billion | $3.940 billion | $4.314 billion |
| EBITDA (non-GAAP) | $2.595 billion | $3.338 billion | $7.019 billion | $7.424 billion |
| Earnings attributable to common shareholders | $450 million | $1.394 billion | $2.377 billion | $3.294 billion |
| Basic and diluted EPS | $0.22 | $0.69 | $1.17 | $1.63 |
- Revenue rose 21% in Q2 and 23% for the first half, driven in part by higher commodity sales and gas distribution revenues. Commodity sales largely carry corresponding commodity costs.
- Q2 operating margin was approximately 11.5%, versus 16.6% a year earlier; common-shareholder earnings margin was approximately 3.4%, versus 12.7%. These are simple calculations from reported figures.
- Management attributed much of the reported earnings decline to non-cash derivative fair-value volatility, restructuring expense, impairments, inventory adjustments, and the absence of a prior-year property-tax settlement. After these specified non-operating factors, management said common earnings increased $64 million for the first half compared with 2021.
- Cash from operations for the first half was $5.473 billion, up from $5.053 billion. Investing activities used $2.120 billion, including $2.002 billion in capital expenditures; financing activities used $2.605 billion. Cash and restricted cash increased by $768 million to $1.088 billion.
- At June 30, total assets were $172.816 billion and equity was $64.537 billion. Current and long-term debt were $7.188 billion and $70.005 billion, respectively. Long-term debt carrying value before debt issuance costs was reported as $77.5 billion, compared with $74.4 billion at year-end 2021.
- Net available liquidity was $6.9 billion, including $5.9 billion of available committed credit facilities and $1.0 billion of unrestricted cash. Enbridge reported compliance with debt covenants and a negative working-capital position of $0.4 billion, excluding current long-term debt maturities.
- The quarterly common dividend was raised 3% to $0.86 per share, effective March 2022. The board declared the same $0.86 quarterly dividend in July, payable September 1, 2022.
Material changes versus the prior comparable period
- Q2 common-shareholder earnings fell by $944 million year over year; first-half earnings fell by $917 million. The filing highlights sharply different unrealized derivative marks, particularly foreign-exchange hedges, as a major source of reported volatility.
- First-half Liquids Pipelines EBITDA increased to $4.147 billion from $4.083 billion, and Gas Transmission and Midstream EBITDA increased to $2.133 billion from $1.841 billion. Gas Distribution and Storage was broadly flat at $1.082 billion versus $1.092 billion.
- Q2 operating cash flow improved while capital expenditures declined year over year, mainly because the U.S. Line 3 Replacement program had entered service in late 2021.
- Debt increased from December 31, 2021. Enbridge also redeemed preference shares, repurchased approximately $150 million of common shares under its normal course issuer bid, and issued new debt during the first half.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear new numerical full-year earnings or cash-flow guidance figure. Management said liquidity and financing arrangements were expected to fund the current capital-project portfolio for 12 months without capital-market access if markets were restricted or pricing unattractive; this is subject to market conditions and other assumptions.
- Management cited higher Liquids Pipelines throughput and the full Line 3 Replacement surcharge, new export assets, and contributions from recently completed gas projects as operating supports. It also noted higher interest and depreciation costs, and volatility in Energy Services results from market conditions.
- Unusual items included Q2 non-cash net unrealized derivative fair-value losses of $850 million (after tax: $651 million), a $100 million restructuring charge tied to the enterprise insurance strategy, a $40 million MacKay River line impairment, and a $62 million negative Energy Services inventory adjustment. First-half results also included a $44 million lease-asset impairment.
- Canadian Mainline interim tolls continued after the prior settlement expired; related interim revenue was considered variable and may be adjusted. Texas Eastern rate-case settlement negotiations and BC Pipeline toll discussions were ongoing. Enbridge Gas’s 2023 rate application was filed, with a regulator decision expected in the second half of 2022.
- Project execution risks include inflation, labor and materials availability, financing costs, weather, and regulatory approvals. Calvados offshore wind had schedule pressure, with its expected in-service date revised to 2025. The OEB denied the St. Laurent project leave-to-construct application; Enbridge Gas continues integrity work on the line.
- After quarter-end, Enbridge announced a 30% investment in the Woodfibre LNG facility, with expected service in 2027 and a long-term gas transportation agreement. Management said ordinary-course legal and regulatory proceedings were not expected to have a material impact; uncertain tax positions remain subject to challenge. The filing reported no material changes to risk factors and effective disclosure controls.
Important facts for investors to verify
- How much of earnings and segment performance reflects recurring operations versus derivative marks, restructuring, impairments, and inventory valuation changes; review the filing’s non-GAAP reconciliations.
- The eventual Canadian Mainline toll arrangement and any adjustments to interim toll revenue, along with outcomes of other rate proceedings.
- Debt maturities, borrowing costs, and continued access to credit facilities, particularly given rising interest rates and the company’s capital commitments and dividends.
- Whether major projects remain on schedule and within estimated costs, including Woodfibre LNG and offshore wind projects.
- Cash generation relative to capital spending, dividends, debt repayment, and share repurchases; first-half operating cash flow less capital expenditures was approximately $3.471 billion, before other investing and financing needs.