Enbridge Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless noted, amounts are Canadian dollars. Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution, renewable power and energy services businesses.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $11.345B | $9.227B | $34.816B | $31.489B |
| Operating income | $854M | $1.490B | $3.303B | $4.532B |
| Earnings | $213M | $1.015B | $2.050B | $3.201B |
| Earnings attributable to common shareholders | $(90)M | $765M | $1.426B | $2.322B |
| Basic earnings per common share | $(0.05) | $0.47 | $0.84 | $1.57 |
| Cash from operating activities | Not stated quarterly | Not stated quarterly | $7.999B | $5.315B |
Q3 revenue increased, but earnings fell sharply, with a common-share loss. A $1.019B goodwill impairment related to the planned sale of Canadian gas gathering and processing businesses was the largest reported item. For the nine-month period, operating cash flow rose, while common-share earnings declined; management cited impairments, asset-sale effects and non-cash derivative mark-to-market movements among the significant unusual items. Revenue growth included higher commodity sales, which carry associated commodity costs.
Segment EBITDA (Enbridge’s segment measure) for Q3 was $1.875B in Liquids Pipelines, $(60)M in Gas Transmission and Midstream, $256M in Gas Distribution, $51M in Green Power and Transmission, and $(96)M in Energy Services. The Gas Transmission and Midstream result included the goodwill impairment. Nine-month consolidated segment EBITDA was $6.721B versus $8.111B in 2017; comparisons were affected by the 2017 merger timing and unusual items.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $643M; restricted cash was $83M. Net available liquidity was $11.514B, down from $12.959B at December 31, 2017, including $10.871B available under committed facilities.
- Long-term debt was $58.707B, with $3.516B current maturities and $1.251B short-term borrowings. Management reported a 46.8% debt capitalization ratio, compared with 48.3% at year-end 2017, and compliance with debt covenants.
- Nine-month investing cash outflow was $3.072B, versus $8.034B in 2017; financing cash outflow was $4.811B, versus $2.081B of inflow. Cash and restricted cash increased by $139M to $726M.
- Enbridge reported negative working capital excluding current maturities of long-term debt, citing funding of its growth capital program; it said available liquidity was sufficient for anticipated needs.
Changes, outlook and material items
- Asset sales: Enbridge sold a 49% interest in specified renewable assets to CPPIB for $1.75B and sold Midcoast Operating for $1.4B. The sale of provincially regulated Canadian gas gathering and processing assets closed October 1 for about $2.5B; the remaining federally regulated sale, expected to close in mid-2019, was valued at about $1.8B. The combined agreed price was approximately $4.3B, subject to adjustments.
- Projects: Management continued to target second-half 2019 service for both Canadian and U.S. Line 3 replacement projects. The U.S. project still required permits; management anticipated permits in time to begin construction in Q1 2019. Atlantic Bridge costs were revised to US$0.6B, about 17% above prior estimates; Valley Crossing costs were revised to US$1.6B, about 12% higher. NEXUS and Valley Crossing entered service after quarter-end.
- Corporate structure: Enbridge agreed to acquire public interests in SEP, EEP, EEQ and ENF through share-based transactions, subject to approvals and closing conditions. Management said the proposals were not expected to materially affect results or cash flows over 2018–2020.
- Operational and regulatory risks: A rupture and fire on the BC Pipeline T-South system occurred October 9; both pipelines returned to service at reduced pressure. Costs were still being determined. Enbridge cited insurance and did not expect a material long-term impact. The filing also discusses regulatory uncertainty, including FERC pipeline tax policy, project permitting and legal challenges.
- Dividends and funding: On November 2, Enbridge announced suspension of its dividend reinvestment plan, effective immediately; future dividends under the plan would be paid in cash. The declared common dividend was $0.671 per share, payable December 1.
- Other obligations: Signed capital expenditure contracts totaled $3.301B, expected to be paid over five years. Enbridge disclosed uncertain tax positions and ongoing legal and regulatory proceedings, which management did not expect to have a material effect, while noting outcomes cannot be predicted with certainty.
The filing provides no specific consolidated earnings or cash-flow guidance figures. Management’s outlook depends on project execution, regulatory approvals, operating performance, commodity and currency conditions, and capital-market access. It cautioned that interim results may be affected by seasonality and may not indicate annual results.
Investor verification priorities
- Reconcile reported and underlying earnings, especially the $1.019B goodwill impairment, other sale-related charges and derivative mark-to-market effects.
- Track completion, proceeds and use of cash from the remaining Canadian gas gathering and processing asset sale.
- Monitor Line 3 permitting, construction timing and project cost estimates, along with revised costs and service dates for other major projects.
- Assess the BC Pipeline rupture investigation, repair and operating restrictions, insurance recoveries and any resulting costs.
- Confirm approvals, share issuance and financial consequences of the proposed sponsored-vehicle transactions, and the effect of the DRIP suspension on cash funding needs.
- Monitor leverage, liquidity, debt maturities and compliance with covenants as the growth program and asset monetizations progress.