Enbridge Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless stated otherwise, amounts are Canadian dollars. Figures are unaudited and consolidated.
Business context and financial results
Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution, renewable power and energy services businesses. The quarter included ongoing investment in growth projects, asset-sale activity and proposed simplification transactions involving sponsored vehicles.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Operating revenue | $10.745B | $11.116B | $23.471B | $22.262B |
| Operating income | $1.571B | $1.684B | $2.449B | $3.042B |
| Earnings | $1.327B | $1.241B | $1.837B | $2.186B |
| Earnings attributable to common shareholders | $1.071B | $919M | $1.516B | $1.557B |
| Basic EPS | $0.63 | $0.56 | $0.90 | $1.11 |
| Segment EBITDA | $2.749B | $2.967B | $4.666B | $5.268B |
Cash flow: First-half operating cash flow was $6.538B, compared with $3.747B a year earlier. Investing activities used $3.139B versus $5.829B; financing activities used $3.399B versus $1.678B provided. Cash and restricted cash ended the period at $622M. Capital expenditures were $3.243B.
Debt and liquidity: At June 30, total balance-sheet debt was approximately $65.7B, comprising short-term borrowings, current maturities and long-term debt. Debt capitalization was 47.5%, down from 48.3% at year-end 2017. Net available liquidity was $12.527B, including $457M unrestricted cash; $12.070B of committed credit facilities was available. The company reported compliance with debt covenants. Negative working capital, excluding current maturities of long-term debt, was attributed mainly to funding growth capital.
Dividends: Common dividends declared for the first half were $1.145B; the board declared a quarterly common dividend of $0.671 per share, payable September 1, 2018.
Material changes versus prior comparable periods
- Q2 revenue declined about 3%, while common-shareholder earnings rose about 17% and EPS increased from $0.56 to $0.63. Management attributed underlying improvement to stronger pipeline throughput and tolls, new assets, improved gas transmission and equity-investment contributions, and colder-weather benefits in gas distribution. Higher interest expense partly offset these factors.
- First-half revenue rose about 5%, but common-shareholder earnings declined about 3% and EPS fell to $0.90 from $1.11. The comparison was affected by the timing of the 2017 merger, a $913M Midcoast impairment and a $154M Line 10 impairment, as well as volatile non-cash derivative marks. Increased share count also weighed on EPS.
- First-half operating cash flow increased substantially; management cited new assets and changes in operating assets and liabilities, which were a $1.600B source of cash versus $497M in the prior period. Investing cash use was lower partly because the prior-year period included a $2.0B Bakken Pipeline System investment and because 2018 included larger distributions from equity investments.
- Q2 segment EBITDA was lower overall, while gas distribution, gas transmission and midstream, green power and energy services each reported higher Q2 EBITDA than a year earlier. Liquids Pipelines EBITDA was affected by derivative marks and prior-year items, despite stronger throughput and toll-related contributions.
Outlook, management commentary and notable items
- Project pipeline: Management listed the Canadian and U.S. Line 3 Replacement Programs as expected in the second half of 2019, subject to construction and permits. The Minnesota Public Utilities Commission approved a certificate and route permit on June 28, 2018; additional permits remained outstanding. The Wisconsin portion was in service.
- Project cost and timing: Atlantic Bridge’s revised estimate was US$0.6B, about 17% above prior estimates, with permitting delays. Valley Crossing’s estimate was US$1.6B, about 12% above prior estimates, reflecting scope changes, reroutes and offshore weather delays. Spruce Ridge’s expected in-service date moved to Q1 2020 due to regulatory delays.
- Asset sales: After quarter-end, Enbridge closed the sale of Midcoast Operating for approximately US$1.1B and sold a 49% interest in specified renewable assets for approximately $1.75B. It also agreed to sell Canadian gas gathering and processing businesses for approximately $4.31B, subject to approvals and closing conditions; portions were expected to close in 2018 and mid-2019.
- Sponsored-vehicle proposals: Enbridge made non-binding all-share proposals to acquire public interests in SEP, EEP, EEQ and ENF. The proposed transactions were subject to negotiation, approvals and customary conditions. Management said they were not expected to materially affect results or cash flows over 2018–2020, if completed as proposed.
- Regulatory and legal risks: FERC’s revised policy on income-tax allowances for MLP interstate pipelines could affect sponsored vehicles, although Enbridge did not expect a material consolidated effect over 2018–2020. Outcomes remained uncertain and could vary by pipeline and rate proceeding. Other matters included challenges to pipeline permits, pending rehearing requests relating to Sabal Trail, and the Army Corps’ additional environmental review of Dakota Access.
- Other unusual items: Q2 included a $258M deferred tax recovery related to the renewable-asset sale, while first-half results included the Midcoast and Line 10 impairments. Unrealized derivative losses and gains can cause significant short-term earnings volatility; management said its hedging program is intended to mitigate economic exposures over time.
- Guidance: The filing does not provide a clear numerical full-year earnings or EPS forecast. Management cautioned that interim results may be affected by seasonality, commodity markets, foreign exchange, interest rates, regulation, project approvals and construction costs.
Key investor verification points
- Assess reported earnings alongside the Midcoast and Line 10 impairments, tax recovery, derivative fair-value movements and other identified unusual items.
- Track remaining permits, construction progress, costs and timing for Line 3 and other major projects; confirm whether revised budgets and in-service dates hold.
- Confirm final proceeds, adjustments, approvals and use of cash from completed and pending asset sales, including the Canadian gas gathering and processing divestiture.
- Monitor debt, refinancing needs, available liquidity, interest expense and capacity to fund capital spending and dividends while maintaining investment-grade credit metrics.
- Follow developments in FERC policy, pipeline litigation and the proposed sponsored-vehicle transactions, including final terms, approvals and any effects on cash flows.
- Review the sustainability of operating cash flow and dividends, recognizing that working-capital movements materially affected first-half cash generation.