Enbridge Inc. — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017; amounts are in Canadian dollars unless stated otherwise. Enbridge operates liquids pipelines, gas transmission and midstream assets, gas utilities, renewable power and energy marketing businesses across North America and Europe.
The February 27, 2017 merger with Spectra Energy materially expanded the company’s gas transmission, midstream and utility operations. Accordingly, 2017 results include Spectra Energy from the closing date and are not directly comparable with 2016 actual results.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $44.378 billion | $34.560 billion |
| Operating income | $1.571 billion | $2.581 billion |
| Earnings attributable to common shareholders | $2.529 billion | $1.776 billion |
| Basic / diluted earnings per share | $1.66 / $1.65 | $1.95 / $1.93 |
| Cash provided by operating activities | $6.584 billion | $5.211 billion |
| Cash used in investing activities | $11.002 billion | $5.192 billion |
| Capital expenditures | $8.287 billion | $5.128 billion |
| Long-term debt, less current portion | $60.865 billion | $36.494 billion |
| Total assets | $162.093 billion | $85.209 billion |
Segment EBITDA totaled $6.288 billion, versus $6.281 billion in 2016, under a segment measure changed to EBITDA for 2017 reporting. Liquids Pipelines EBITDA was $6.395 billion; Gas Transmission and Midstream recorded a loss of $1.269 billion, principally reflecting the large asset write-down described below; Gas Distribution contributed $1.390 billion. Energy Services recorded an EBITDA loss of $263 million as crude oil and NGL location and quality differentials compressed.
At year-end, cash and cash equivalents were $480 million and committed credit facilities had $12.479 billion available. Reported net available liquidity, including unrestricted cash, was $12.959 billion. The company reported a negative working-capital position of $2.538 billion, excluding current debt maturities, and a debt capitalization ratio of 48.3%, down from 61.8% in 2016. All debt covenants were met. The filing states that liquidity was intended to cover anticipated needs for approximately one year without capital-market access.
Common dividends paid were $2.41 per share for 2017, compared with $2.12 in 2016. A quarterly rate of $0.671 was announced for payment March 1, 2018, a 10% increase from the prior rate.
Material changes and unusual items
- Revenue rose with the merger and increased asset base, but operating income fell to $1.571 billion from $2.581 billion. Operating expenses included $4.463 billion of long-lived asset impairments, compared with $1.376 billion in 2016.
- A $4.391 billion pre-tax impairment on certain U.S. Midstream assets held for sale, plus a $102 million goodwill impairment, followed the decision to sell non-core assets. The reported after-tax impact of the asset loss was approximately $2.8 billion.
- Common-share earnings included a non-cash $1.936 billion income-tax benefit from U.S. tax reform and a $1.109 billion unrealized derivative fair-value gain. These items materially affect the interpretation of reported earnings; derivative marks can reverse as market values change.
- Merger-related and restructuring costs included $354 million of employee severance and restructuring costs and $205 million of project development and transaction costs, as described in the earnings discussion.
- Basic EPS declined despite higher common-share earnings, reflecting substantial share issuance for the merger and additional equity financing. Common shares outstanding increased from 943 million to 1.695 billion during the year.
- Operating cash flow increased, but investment spending also rose substantially as Enbridge funded projects and acquired interests, including the Bakken Pipeline System. Financing included approximately $1.5 billion from a common-share private placement and $500 million from preferred shares.
- In Q4 2017, operating income was a loss of $2.961 billion and earnings were $65 million, reflecting the held-for-sale impairment.
Guidance, outlook and risks
Management’s 2018–2020 plan focuses on regulated pipelines and utilities, integration and cost reductions, project execution, and strengthening the balance sheet. The company reported approximately $22 billion of commercially secured growth projects expected to enter service through 2020; it placed approximately $12 billion of growth projects into service in 2017. The filing does not provide a clear numerical earnings or EPS forecast in the supplied text.
Enbridge identified at least $3 billion of asset sales or monetizations targeted for 2018 from a broader $10 billion portfolio of identified non-core assets. Management also described equity issuance through the dividend reinvestment program, hybrid securities and asset sales as components of its balance-sheet plan. The dividend policy remains subject to board discretion, financial condition, earnings, capital needs and other constraints.
- Project and regulatory execution: The U.S. Line 3 Replacement Program remained dependent on Minnesota approvals; a supplemental environmental impact statement was under review, with a commission vote expected in Q2 2018. NEXUS and other construction schedules also carried permitting, cost and completion risks.
- Legal and environmental exposure: The Line 6B release’s cumulative cost estimate remained US$1.2 billion, with an estimated US$62 million liability at year-end. The company reported it would receive no further recovery from the disputed US$85 million insurance claim. A 2017 consent decree required a US$68 million payment for the Line 6A and 6B releases.
- Other legal and regulatory matters: Dakota Access faced further environmental review and interim requirements following court proceedings. The Sabal Trail certificate was remanded for supplemental greenhouse-gas analysis, with related motions pending in early 2018. The Bad River Band’s Line 5 easement position could affect pipeline operations.
- Market and operating risks: Pipeline utilization and project economics depend on oil and gas supply, demand, price differentials, competing transportation and customer commitments. Gas midstream and Energy Services remain more exposed to commodity and margin conditions; renewable output depends on weather and asset availability.
- Capital and financing risks: The company depends on capital-market access and investment-grade ratings. Moody’s downgraded Enbridge’s issuer and senior unsecured ratings to Baa3 in December 2017, with a stable outlook; other cited agency ratings were investment grade.
- Tax reform: The 2017 tax benefit included provisional estimates; management said final effects could differ as guidance and tax-return analysis are completed.
PricewaterhouseCoopers LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the composition and valuation assumptions behind the $4.391 billion U.S. Midstream held-for-sale impairment, and monitor whether planned asset sales close at expected values and on schedule.
- Separate recurring operating and cash-flow performance from tax benefits, derivative fair-value movements, merger costs and other unusual items; assess the merger’s full-year pro forma comparison disclosed in the filing.
- Track debt, ratings, funding requirements and dividend coverage alongside the secured capital program, asset monetizations and any further equity or hybrid issuance.
- Confirm permitting, construction timing and cost developments for the U.S. Line 3 Replacement Program, NEXUS and other major projects.
- Monitor outcomes and potential cash impacts from the Line 6A/6B releases, Dakota Access, Sabal Trail and Line 5 easement matters, as well as environmental and insurance recoveries.
- Assess whether pipeline throughput, contracted revenues and gas utility rate recovery remain resilient under changing commodity differentials, weather, regulation and customer demand.