Enbridge Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in Canadian dollars unless otherwise stated. Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution, renewable power and energy services businesses.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $11.598B | $11.345B | $37.717B | $34.816B |
| Operating income | $1.588B | $854M | $6.492B | $3.303B |
| Earnings | $1.060B | $213M | $4.913B | $2.050B |
| Earnings attributable to common shareholders | $949M | $(90)M | $4.576B | $1.426B |
| EPS | $0.47 | $(0.05) | $2.27 | $0.84 |
| EBITDA, as reported by Enbridge | $2.803B | $2.055B | $10.680B | $6.721B |
For the first nine months, operating cash flow was $7.405B, compared with $7.999B in 2018. Investing activities used $5.029B and financing activities used $2.124B; cash and restricted cash increased by $235M to $872M. Capital expenditures were $3.928B.
At September 30, 2019, total assets were $166.641B and total equity was $72.676B. Long-term debt was $60.879B, current maturities of long-term debt were $4.536B, and short-term borrowings were $1.269B. Debt capitalization was 47.9%, versus 46.8% at year-end 2018. Net available liquidity was $7.223B, including $815M in unrestricted cash; the company reported negative working capital excluding current debt maturities. Enbridge was in compliance with debt covenants.
The board declared a quarterly common dividend of $0.738 per share, payable December 1, 2019. The filing does not provide a clear numerical full-year earnings or cash-flow forecast.
Material changes versus the prior comparable period
- Reported earnings rose sharply, but comparisons are materially affected by 2018 impairments and other unusual items. The 2019 nine-month result included a $1.052B pre-tax unrealized derivative gain, while 2018 included significant goodwill and asset impairments. Results also reflect inventory write-downs, project-cost write-offs, divestitures and changes in noncontrolling interests. Management identified these items as affecting comparability; reported growth should not be treated as equivalent to recurring operating growth.
- Management attributed underlying gains to higher Mainline tolls and throughput, stronger throughput on certain U.S. crude pipelines, new gas transmission assets, gas distribution rate and customer growth, and improved Energy Services margins. Higher pipeline integrity costs, sold businesses and, for the nine-month period, higher income tax expense partly offset gains.
- Operating cash flow declined year over year, primarily due to changes in operating assets and liabilities. Capital expenditures were lower than in the prior-year period; investing cash use was higher in 2019, partly because 2018 included disposition proceeds and a large return-of-capital distribution.
Outlook, risks and unusual items
- Enbridge reported a $19B inventory of secured projects at various stages, scheduled for service from 2019 through 2023, and announced $2B of additional growth projects. Its Canadian Line 3 replacement program was expected to enter service December 1, 2019, subject to the stated commercial and tariff arrangements.
- The U.S. Line 3 replacement schedule remained uncertain because of Minnesota environmental review and permitting. Enbridge said U.S. costs were above budget due to delays and the overall program could exceed its $9B estimate depending on the in-service date.
- The CER ordered a regulatory review before Enbridge could offer firm service and related tolls on its Mainline System. Enbridge planned to seek approval, but timing and terms remained subject to regulatory review.
- A fatal rupture on Texas Eastern Line 15 in Kentucky caused $18M of lower revenue and higher operating costs in Q3 before expected insurance recoveries. The affected line remained shut down, with no return-to-service date stated.
- Other significant exposures include litigation and regulatory uncertainty relating to Line 5 and the Bad River Reservation, challenges concerning the Dakota Access Pipeline, and ordinary-course proceedings. Management said resolution of ordinary-course legal matters was not expected to materially affect consolidated results, but outcomes cannot be predicted with certainty.
- Enbridge cited commodity prices, supply and demand, foreign exchange, interest rates, construction costs, permits, weather and market access as assumptions or risks affecting forward-looking statements. It cautioned that hedging creates non-cash reported earnings volatility.
- Subsequent to quarter-end, Enbridge closed the sale of Enbridge Gas New Brunswick for approximately $331M and St. Lawrence Gas for approximately $72M, and issued $1B of 10-year notes at a 2.99% coupon.
Important facts for investors to verify
- Reconcile reported earnings growth with recurring operating performance, especially the effects of derivative mark-to-market gains, prior-year impairments and asset sales.
- Track U.S. Line 3 permitting, cost estimates and schedule, and confirm the Canadian Line 3 in-service and tariff status.
- Monitor Mainline contracting and regulatory decisions, including their potential effect on tolls, service and cash flows.
- Assess debt, refinancing needs, negative working capital, liquidity and the funding demands of the secured growth program and dividend.
- Follow the Texas Eastern Line 15 investigation, repair timeline, insurance recoveries and related operating effects, along with Line 5 and other material legal proceedings.