Enbridge Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in Canadian dollars unless noted. Enbridge operates liquids and gas pipelines, gas distribution and storage, renewable power and energy services businesses.
Financial results and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $12.013 billion | $12.856 billion |
| Operating income | $1.513 billion | $2.619 billion |
| Net earnings (loss) attributable to common shareholders | $(1.429) billion | $1.891 billion |
| Diluted earnings (loss) per common share | $(0.71) | $0.94 |
| Cash provided by operating activities | $2.809 billion | $2.176 billion |
| Capital expenditures | $1.158 billion | $1.627 billion |
| Common dividends paid | $1.641 billion | $1.486 billion |
Revenue declined about 7% year over year; operating income fell about 42%. Operating margin, calculated as operating income divided by revenue, was approximately 12.6%, compared with 20.4%. Reported results were heavily affected by noncash impairments and derivative revaluations.
At March 31, 2020, cash and restricted cash totaled $840 million. Balance-sheet debt included $63.571 billion of long-term debt, $4.221 billion of current long-term debt and $835 million of short-term borrowings. Total equity was $72.291 billion. Available committed credit facilities were $12.386 billion; including unrestricted cash, net available liquidity was $13.185 billion. Enbridge reported compliance with debt covenants, but negative working capital excluding current debt maturities.
Material changes and unusual items
- Net loss included a $1.736 billion impairment of the DCP Midstream investment and a further $324 million equity share of DCP Midstream asset and goodwill impairments.
- Unrealized derivative fair-value losses and gains were volatile: the filing cites a $1.956 billion loss related to derivatives managing foreign-exchange risks and a $551 million gain related to derivatives managing transportation, storage and commodity-price exposures. These are generally noncash and can make reported quarterly earnings fluctuate.
- Energy Services wrote down crude oil and natural gas inventories by $417 million. A $159 million loss followed a Texas Eastern rate-case settlement and re-establishment of a regulated tax liability.
- Foreign-currency translation contributed $5.637 billion of other comprehensive income, substantially increasing reported accumulated other comprehensive income.
- The common quarterly dividend had increased 9.8% to $0.81 per share effective March 1, 2020; the board declared another $0.81 quarterly dividend in May.
Business performance and management commentary
- Liquids Pipelines: Reported EBITDA was $850 million versus $2.072 billion, mainly reflecting foreign-exchange derivative marks. Excluding identified unusual items, management cited a $190 million increase, supported by higher Mainline tolls and throughput. Q1 Mainline throughput was 2,842 kbpd versus 2,717 kbpd a year earlier.
- Gas Transmission and Midstream: Reported EBITDA was a loss of $1.054 billion, principally due to the DCP-related impairments and Texas Eastern settlement item. Excluding identified unusual items, management cited a $57 million increase, including settled Texas Eastern rates and new assets.
- Gas Distribution and Storage: EBITDA was $604 million versus $662 million. Warmer weather and asset dispositions weighed on results, partly offset by customer growth and synergies.
- Renewable Power: EBITDA was $120 million versus $124 million; lower wind resources were partly offset by new wind-project contributions.
- Energy Services: EBITDA was $121 million versus $6 million, but the comparison included large derivative valuation gains and inventory write-downs. Excluding unusual items, management cited weaker margins due to compressed location and quality differentials.
Outlook, risks and contingencies
- COVID-19 restrictions, reduced oil demand and increased producer supply sharply weakened commodity prices. Enbridge said the duration and ultimate financial impact were uncertain. Management reported no operational disruption at the time of the filing.
- April crude-pipeline volumes averaged about 400 kbpd below Q1’s 2,842 kbpd average. The filing estimated Q2 volumes could be 400–600 kbpd below the Q1 average, with recovery expected in the second half of 2020 as restrictions eased. Management estimated each 100 kbpd volume change could alter quarterly revenue, net of power savings, by approximately $35 million.
- Management planned approximately $300 million of operating-cost reductions and expected 2020 capital expenditures to be about $1 billion below budget, largely shifting into 2021. It reported approximately $14 billion of net available liquidity after subsequent financing actions and said this could fund current capital projects and debt maturities through 2021 without capital-market access if needed. This is management’s stated expectation, not a guarantee.
- DCP Midstream reduced distributions to Enbridge by 50%, beginning with the Q1 distribution paid in May, reducing expected cash flow. Customer and supplier credit quality was also under monitoring.
- The U.S. Line 3 Replacement project remained subject to permits; timing was uncertain and costs could exceed the stated $9 billion program estimate, although Enbridge did not then expect a material impact to its financial position or outlook. The Dakota Access Pipeline faced an ordered environmental impact statement and a pending court remedy decision. Line 5 matters included ongoing litigation and permitting for the proposed tunnel.
- On May 4, 2020, after quarter-end, a rupture occurred on a Line 10 segment of the Texas Eastern natural gas system in Kentucky. The segment was isolated and authorities were investigating; no injuries or damaged structures had been reported.
- Other post-quarter transactions included the Ozark asset sale for approximately $60 million and Montana-Alberta Tie Line sale for approximately $180 million. Enbridge also agreed to sell a 49% interest in its French offshore wind investment, subject to approvals.
- Management said ordinary-course legal and regulatory proceedings were not expected to materially affect financial position or results, while noting uncertain tax positions and approximately $2.3 billion of contracted capital-expenditure commitments over five years.
Most important facts for investors to verify
- Whether oil-pipeline volumes recovered as expected, and the resulting effects on revenue, cash flow and customer credit.
- Whether cost reductions, lower capital spending and asset-sale proceeds supported liquidity, debt service and dividend payments through 2021.
- The cash-flow and valuation implications of DCP Midstream’s impairment and distribution reduction, and the extent of further impairments.
- Progress on Line 3 permits and costs, Line 5 litigation and permits, and the Dakota Access court process.
- The investigation, operational impact and any resulting costs or liability from the Texas Eastern pipeline rupture.