Enbridge Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in Canadian dollars unless stated otherwise. The interim statements are unaudited and prepared under U.S. GAAP.
Business context
Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services businesses. Management reported that crude demand was recovering as economies reopened; the Mainline System remained substantially full in Q3. The U.S. Line 3 Replacement was placed in service October 1, 2021, restoring the line to its historic capacity of 760,000 barrels per day.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $11.466B | $9.110B | $34.551B | $29.079B |
| EBITDA | $2.605B | $2.988B | $10.029B | $6.661B |
| Operating income | $1.388B | $2.095B | $5.702B | $5.706B |
| Earnings attributable to common shareholders | $682M | $990M | $3.976B | $1.208B |
| Diluted earnings per common share | $0.34 | $0.49 | $1.96 | $0.60 |
| Cash provided by operating activities | Not presented by quarter | Not presented by quarter | $6.954B | $7.527B |
Q3 revenue growth was led by commodity sales, which rose to $7.279B from $4.595B; these sales were largely offset by commodity costs. Q3 EBITDA and earnings were affected by unfavorable non-cash derivative mark-to-market movements. The company did not provide a clear consolidated margin figure in the filing.
Nine-month capital expenditures were $5.475B, versus $3.790B a year earlier. Net cash used in investing activities was $5.495B; net cash used in financing activities was $1.422B. Cash and restricted cash ended the period at $515M.
At September 30, 2021, long-term debt had a carrying value of $70.0B before debt issuance costs; the balance sheet also reported $1.205B of short-term borrowings. Net available liquidity was $10.0B, including $451M of unrestricted cash, and $9.570B remained available under committed credit facilities. The company reported compliance with debt covenants. It had negative working capital excluding current maturities of long-term debt, which management attributed primarily to funding its growth capital program.
Changes versus the prior comparable periods
- Q3 common-share earnings fell to $682M from $990M. Management cited a $436M unrealized derivative fair-value loss versus a $569M gain in Q3 2020, along with an $88M unrealized loss on other derivatives versus a $73M gain. These are non-cash items associated with the company’s hedging program.
- Q3 EBITDA was lower year over year, despite stronger pipeline and gas transmission contributions, in part because 2020 included substantially larger equity-investment impairment charges. PennEast was impaired by $111M in 2021 after development ceased; 2020 included $615M of impairments to other equity investments.
- Nine-month common-share earnings increased to $3.976B from $1.208B. The comparison benefited substantially from the absence of 2020 charges, including a $1.7B impairment of the DCP Midstream investment and other equity-investment and asset impairments. Management also cited higher liquids pipeline volumes and tolls, gas distribution growth, a new gas transmission project, and lower interest expense.
- Energy Services performed materially worse in the nine-month comparison, reporting an EBITDA loss of $379M versus a $12M loss. Management cited compressed location and quality differentials, fewer storage opportunities, the February 2021 winter storm, and fewer profitable transportation-margin opportunities.
Outlook, management commentary, risks and unusual items
- Management said its 2021 financing plan requirements were complete and that financing, together with 2020 funding activity, was expected to support current capital projects for 12 months without capital-market access if markets were restricted or pricing unattractive. No specific consolidated earnings or cash-flow guidance is provided in the supplied filing text.
- On October 12, 2021, Enbridge acquired Moda Midstream for US$3.0B cash plus contingent consideration. Moda owns Gulf Coast crude pipeline, storage and export assets. This post-quarter acquisition is not reflected in the September 30 financial statements.
- The Canadian Mainline Competitive Tolling Settlement expired June 30, 2021. Existing tolls continued on an interim basis pending a Canada Energy Regulator decision and possible adjustment; management did not expect a significant revenue adjustment when resolved.
- Line 5 faces significant litigation and regulatory uncertainty in Michigan, including the State’s attempt to terminate its easement. The Great Lakes Tunnel project faces environmental review and permitting steps; the Army Corps’ environmental impact statement process is expected to delay construction.
- DAPL’s easement has been vacated and an environmental impact statement is required. The pipeline continued operating at period end, but the Army Corps was considering its enforcement position; the filing reported an expected EIS completion date of September 2022.
- Other material matters include Texas Eastern’s rate case, a $1.8B commitment for contracted services and materials over five years, and tax positions that could be challenged. Management stated that it did not expect ordinary-course legal and regulatory proceedings to materially affect consolidated financial position or results, but outcomes remain uncertain.
- COVID-19’s future duration and effects remained uncertain. Management described demand recovery and continued monitoring of supply-and-demand risks. Moody’s upgraded Enbridge’s ratings to Baa1 from Baa2 in June 2021, with a stable outlook.
Important facts for investors to verify
- Track the CER decision and final tolling terms for the Canadian Mainline, including any adjustment to interim revenue.
- Monitor Line 5 litigation, permitting and tunnel schedule, and DAPL EIS and easement developments for potential operational or financial consequences.
- Assess the effect of the US$3.0B Moda acquisition and contingent consideration on debt, liquidity and future cash flows once purchase accounting and subsequent results are reported.
- Distinguish recurring operating performance and cash generation from non-cash derivative revaluations and prior-period impairment effects when comparing earnings.
- Review capital spending, debt maturities and liquidity against the company’s growth program and dividend commitments.