Enbridge Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. Unless stated otherwise, amounts are in Canadian dollars. Enbridge operates North American liquids and natural gas pipelines, regulated gas utilities, renewable generation and energy marketing businesses.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $46.378 billion | $44.378 billion |
| Operating income | $4.816 billion | $1.571 billion |
| Earnings attributable to common shareholders | $2.515 billion | $2.529 billion |
| Basic and diluted earnings per share | $1.46 | $1.66 basic; $1.65 diluted |
| Cash from operating activities | $10.502 billion | $6.658 billion |
| Capital expenditures | $6.806 billion | $8.287 billion |
| Long-term debt, excluding current maturities | $60.327 billion | $60.865 billion |
Operating margin rose to about 10.4% from 3.5%; common-share earnings margin was about 5.4%, versus 5.7%. Revenue includes substantial pass-through gas distribution and commodity sales, so revenue growth alone is not a measure of underlying profitability. Segment EBITDA was $9.519 billion, compared with $6.288 billion in 2017.
Year-end cash and cash equivalents were $518 million, and net available liquidity was $9.409 billion, down from $12.959 billion. Committed credit facilities totaled $18.308 billion, with $8.891 billion available. Working capital excluding current debt maturities was negative $3.024 billion. Debt capitalization was 46.8%, down from 48.3%; the company reported compliance with debt covenants and investment-grade ratings.
Common dividends paid were $2.68 per share for 2018, up from $2.41. Enbridge announced a 10% increase to $0.738 quarterly per share, effective for the March 2019 payment. The dividend remains subject to board discretion and financial, legal and regulatory constraints.
Changes and significant items
- Revenue increased about 4.5%, while common-share earnings were nearly unchanged and earnings per share declined, reflecting a larger share count after the 2018 sponsored-vehicle buy-ins and earlier merger-related issuance.
- Operating cash flow increased substantially. Cash flow comparisons were affected by changes in working capital; investing cash use fell partly because asset-sale proceeds rose to $4.452 billion from $628 million.
- Reported earnings included major unusual items: a $1.019 billion goodwill impairment tied to the Canadian natural gas gathering and processing businesses held for sale; a $913 million loss on the Midcoast disposal group; a $154 million Line 10 impairment; and a $894 million non-cash unrealized derivative loss, versus a $1.109 billion gain in 2017. These were partly offset by a $267 million deferred tax recovery related to renewable assets and a $223 million recovery from U.S. gas transmission rate cases.
- Enbridge completed the buy-ins of SEP, EEP, EEM and ENF, simplifying its structure and issuing approximately 297 million common shares valued at $12.7 billion. It also monetized non-core assets: the filing describes approximately $7.8 billion of announced sales, of which $5.7 billion had closed by the filing date.
- Pipeline and utility growth projects placed in service included NEXUS, Valley Crossing and other expansions. Mainline throughput reached a record 2.8 million barrels per day at Gretna in November, though portions of the system remained apportioned.
Outlook, risks and contingencies
- Management said the secured capital program extending beyond 2020 could be financed with internally generated cash flow and available balance-sheet capacity without issuing additional common equity. From 2020, it expects $5 billion to $6 billion of available capital annually for reinvestment, subject to assumptions and execution.
- Management expected the Canadian Line 3 replacement to enter service in the second half of 2019 and the U.S. Line 3 project before year-end 2019, subject to approvals. Atlantic Bridge, Spruce Ridge and T-South had revised expected in-service dates of 2020, 2020 and 2021, respectively; regulatory delays were cited.
- Alberta’s production curtailment began January 1, 2019, amid constrained Western Canadian export capacity and unusually wide crude price discounts. Enbridge said its mainline remained highly utilized and that commercial arrangements and competitive tolls moderated exposure, but long-term low prices or delayed infrastructure could constrain producer investment and volumes.
- Key risks include permitting and right-of-way delays, cost overruns, pipeline incidents, safety and environmental liabilities, regulatory changes, commodity and foreign-exchange movements, interest rates, cyber incidents, competition, access to capital and the ability to complete asset sales. The filing reports a 2018 incident on the BC Pipeline T-South system and a January 2019 Texas Eastern incident; insurance may not cover all losses.
- Legal and regulatory matters include challenges involving the Dakota Access Pipeline and Line 5 easements. Management stated that resolution of other ordinary-course proceedings was not expected to materially affect consolidated financial position or results, while acknowledging outcomes are uncertain.
- Management reported that the 2018 audited financial statements fairly present the company’s results under U.S. GAAP and that internal control over financial reporting was effective; the auditor issued unqualified opinions.
Investor verification points
- Reconcile reported earnings with the sizeable impairments, disposal losses, derivative fair-value swings and tax-related recoveries; assess recurring cash generation separately.
- Verify completion, proceeds and use of proceeds for remaining asset sales, particularly the federally regulated gathering and processing assets and other pending dispositions.
- Track Line 3 and other project approvals, costs, schedules and realized returns, including the impact of regulatory delays.
- Assess debt maturities, liquidity, refinancing access and the capacity to fund planned investment and dividends while maintaining leverage targets.
- Monitor Western Canadian crude differentials, Alberta curtailment policy, pipeline apportionment and resulting shipper volumes.
- Review safety and environmental developments, including the T-South and Texas Eastern incidents, Line 5 easement negotiations and the Dakota Access litigation.