Enbridge Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Unless noted otherwise, amounts are in Canadian dollars. This is an annual report, not a standalone fourth-quarter filing; the filing also includes unaudited quarterly results.
Business context
Enbridge is a North American energy infrastructure company operating liquids pipelines, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services businesses. Its revenue model is substantially supported by regulated rates, long-term contracts, and other commercial arrangements. The company reported transporting approximately 25% of North American crude oil production and 20% of U.S. natural gas consumption, and serving about 3.8 million gas utility customers.
Financial results and liquidity
| Metric (C$ millions, except per-share data and ratios) | 2019 | 2018 |
|---|---|---|
| Operating revenues | 50,069 | 46,378 |
| Operating income | 8,260 | 4,816 |
| Earnings attributable to common shareholders | 5,322 | 2,515 |
| Diluted earnings per common share | 2.63 | 1.46 |
| Cash provided by operating activities | 9,398 | 10,502 |
| Capital expenditures | 5,492 | 6,806 |
| Total assets | 163,269 | 166,905 |
| Long-term debt, excluding current portion | 59,661 | 60,327 |
- Total debt was C$64,963 million, including C$4,404 million of current maturities and C$898 million of short-term borrowings. Management reported a trailing-twelve-month debt-to-EBITDA ratio of 4.5x, at the low end of its target range.
- Net available liquidity was C$9,901 million, including C$648 million of unrestricted cash. Enbridge reported compliance with debt covenants. Working capital remained negative by C$2,781 million, excluding current maturities of long-term debt; management cited growth-program liabilities and available liquidity as funding support.
- Segment EBITDA was C$7,681 million for Liquids Pipelines, C$3,371 million for Gas Transmission and Midstream, C$1,747 million for Gas Distribution and Storage, C$111 million for Renewable Power Generation, and C$250 million for Energy Services.
- The quarterly common dividend paid in 2019 was C$0.738 per share. A 9.8% increase to C$0.81 quarterly, or C$3.24 annualized, was announced for payment beginning March 1, 2020.
Changes versus 2018
- Revenue rose about 8%, operating income increased C$3.444 billion, and common-share earnings more than doubled. Reported results included significant non-cash derivative valuation changes and other unusual items, so the increase does not represent solely underlying operating growth.
- Management identified C$2.034 billion of net favorable effects on common earnings from unusual, infrequent, or other non-operating factors. These included a C$1.276 billion after-tax unrealized derivative gain attributable to Enbridge and the absence of major 2018 impairment and disposal losses. Offsetting 2019 items included a C$467 million after-tax loss on the sale of federally regulated Canadian gas gathering and processing assets, a C$229 million after-tax hedge reset loss, and a C$218 million after-tax MATL impairment.
- After those items, management attributed the remaining C$773 million increase in common earnings principally to stronger liquids pipeline throughput and tolls, new gas transmission assets, colder weather and higher rates at the utility, and improved Energy Services margins. Higher integrity costs, divested assets, depreciation, and income taxes were offsets.
- Operating cash flow declined about 11%, primarily because of changes in working capital and other operating assets and liabilities, partly offset by stronger segment contributions and new assets. Capital expenditures fell to C$5.492 billion.
- Enbridge completed the sale of federally regulated Canadian natural gas gathering and processing assets for approximately C$1.7 billion, following earlier asset sales. It said proceeds from non-core asset sales over the preceding three years totaled about C$8 billion. The Ontario gas utilities were amalgamated as Enbridge Gas on January 1, 2019.
Outlook, commentary, and risks
- Management said 2019 financial results were at the high end of guidance; the supplied filing text does not provide a clear numeric 2019 guidance range. Enbridge targeted C$11 billion of secured growth projects and expected to invest C$5 billion to C$6 billion annually in new growth after completion of the secured program, without issuing additional common equity and while maintaining credit metrics within planning targets.
- The Canadian Line 3 replacement entered service on December 1, 2019. The U.S. Line 3 project remained dependent on permits and regulatory proceedings; management could not determine when all permits would be issued and noted a risk that the combined program could exceed its C$9 billion total cost estimate, while not expecting a material impact to financial position or outlook at that time.
- The Mainline contracting proposal was filed with the Canada Energy Regulator in December 2019. A regulatory review was expected to continue through most of 2020; the existing toll settlement was due to expire June 30, 2021, but would continue on an interim basis if no replacement were approved.
- A Texas Eastern pipeline rupture in Kentucky in August 2019 caused one fatality. The affected line remained shut down with no established return-to-service date. The incident reduced revenue and increased operating costs by C$34 million before expected insurance recoveries.
- Other material uncertainties include Line 5 litigation and permitting, pipeline safety and environmental obligations, project delays and cost inflation, regulatory changes, stakeholder opposition, commodity and foreign-exchange volatility, interest rates, access to capital, and asset utilization. Enbridge also cited cyber-security, extreme weather, customer credit, and workforce risks.
- Management stated that its long-term economic hedging program supports cash-flow stability but can create substantial short-term earnings volatility from mark-to-market accounting. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; goodwill impairment testing was identified as a critical audit matter.
Important facts for investors to verify
- Underlying earnings and cash-flow trends after separating non-cash derivative marks, asset impairments, divestiture losses, and other unusual items.
- Progress, permits, timing, and final costs for the U.S. Line 3 Replacement Program, and the outcome of the Mainline contracting application.
- Texas Eastern repair, regulatory investigation, insurance recoveries, and the timing of a return to service for the affected line.
- Debt reduction, leverage, refinancing needs, liquidity, and the capacity to fund growth spending and dividends without new common equity.
- Developments in Line 5 legal proceedings, environmental and safety obligations, and any resulting operating restrictions or capital commitments.
- Whether planned growth projects and post-program annual investment opportunities achieve expected returns and in-service dates.