Enbridge Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are Canadian dollars unless noted.
Business context and financial performance
Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services businesses. Management said the Mainline System had returned to substantially full capacity as oil demand recovered from the pandemic downturn.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $10.948 billion | $7.956 billion | $23.085 billion | $19.969 billion |
| Operating income | $1.816 billion | $2.098 billion | $4.314 billion | $3.611 billion |
| Earnings attributable to common shareholders | $1.394 billion | $1.647 billion | $3.294 billion | $218 million |
| Diluted earnings per common share | $0.69 | $0.82 | $1.63 | $0.11 |
| EBITDA | $3.338 billion | $3.998 billion | $7.424 billion | $3.673 billion |
| Cash from operating activities | Not separately presented for the quarter | $4.791 billion | $5.225 billion |
EBITDA means earnings before interest, income taxes, and depreciation and amortization. Q2 revenue growth was driven largely by commodity sales, which rose to $6.334 billion from $2.936 billion; commodity costs also increased. Reported Q2 earnings and EBITDA were affected by non-cash derivative valuation changes and prior-year inventory adjustments.
Cash flow, debt and liquidity
- First-half investing cash outflow was $3.339 billion, including $3.463 billion of capital expenditures; financing cash outflow was $1.463 billion. Cash and restricted cash ended the period at $459 million.
- At June 30, 2021, short-term borrowings were $1.410 billion, current long-term debt was $3.739 billion, and long-term debt was $63.090 billion. Combined reported borrowings were approximately $68.2 billion.
- Committed credit facilities totaled $20.936 billion, with $8.510 billion available. Management reported net available liquidity of $8.9 billion, including $374 million of unrestricted cash, and said liquidity was sufficient to fund anticipated needs for about one year without capital-market access.
- Enbridge reported compliance with all debt covenants. Moody’s upgraded Enbridge Inc. ratings to Baa1 from Baa2 in June, with a stable outlook. The common quarterly dividend was increased 3% to $0.835 per share effective March 1, 2021.
Material changes versus the prior comparable periods
- Q2 common-shareholder earnings fell to $1.394 billion from $1.647 billion, despite higher transportation volumes and contributions from new assets. The filing attributes much of the comparison to derivative mark-to-market gains and the absence of a large prior-year inventory adjustment.
- First-half common-shareholder earnings increased to $3.294 billion from $218 million. The comparison benefited significantly from the absence of 2020 DCP Midstream investment and asset impairments totaling $1.7 billion and $324 million, respectively, as well as more favorable foreign-exchange derivative marks.
- First-half operating cash flow declined to $4.791 billion from $5.225 billion, while capital expenditures increased to $3.463 billion from $2.352 billion.
- Segment results were mixed: first-half EBITDA increased in Liquids Pipelines and Gas Distribution and Storage, while Energy Services reported a $175 million loss versus $22 million of EBITDA in 2020. Renewable Power Generation EBITDA was $271 million versus $283 million.
Outlook, commentary, risks and unusual items
- No consolidated numerical earnings or EBITDA guidance is stated in the provided filing text. The US Line 3 Replacement Program was progressing on schedule, with a targeted fourth-quarter 2021 in-service date; appeals and further court review remained pending.
- Management said the Canadian Mainline contracting application was awaiting a Canada Energy Regulator decision expected later in 2021. Existing tolls continued on an interim basis after the related settlement expired June 30, 2021.
- Energy Services faced compressed location and quality differentials, fewer storage opportunities in a backwardated market, and fewer profitable transportation opportunities. The February 2021 US Midwest winter storm also adversely affected first-half results.
- Material legal and regulatory uncertainties include Michigan’s efforts to terminate the Line 5 Straits easement and DAPL’s vacated Army Corps easement and ongoing environmental review. Management said resolution of ordinary-course legal matters was not expected to materially affect financial position or results, but outcomes remain uncertain.
- COVID-19 impacts remained uncertain, although management reported recovery in oil demand and substantially full Mainline utilization. Other risks include regulatory approvals, construction timing and costs, commodity and foreign-exchange movements, interest rates, and access to capital markets. The company disclosed approximately $2.5 billion of contracted purchases of services, pipe, and other materials payable over five years.
- Unusual earnings drivers included non-cash derivative revaluations, prior-year DCP Midstream impairments and Energy Services inventory adjustments, and 2020 workforce-reduction costs. Management cautioned that derivative marks can create short-term earnings volatility despite the company’s long-term hedging objectives.
Important facts for investors to verify
- Progress, costs, timing, and remaining legal approvals for the US Line 3 Replacement Program and other major capital projects.
- Developments in the Line 5 and DAPL proceedings, including potential operational effects and timing of decisions.
- Underlying operating performance and cash generation apart from derivative mark-to-market effects and other unusual items.
- Debt maturities, available committed liquidity, capital spending, and dividend funding needs.
- Regulatory outcomes for Canadian Mainline contracting and relevant gas transmission and distribution rate cases.