Enbridge Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited interim financial statements prepared under U.S. GAAP; amounts are Canadian dollars unless stated otherwise.
Business context and financial performance
Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services. COVID-19 and lower commodity prices reduced crude oil demand and pipeline volumes, while much of the company’s business remained supported by long-term take-or-pay and cost-of-service contracts.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $7.956B | $13.263B | $19.969B | $26.119B |
| Operating income | $2.098B | $2.285B | $3.611B | $4.904B |
| Earnings attributable to common shareholders | $1.647B | $1.736B | $218M | $3.627B |
| Basic and diluted EPS | $0.82 | $0.86 | $0.11 | $1.80 |
| EBITDA | $3.998B | $3.745B | $3.673B | $7.877B |
| Cash from operating activities | Not separately stated | Not separately stated | $5.225B | $4.670B |
Q2 revenue fell mainly because Energy Services commodity sales declined; revenue includes substantial commodity sales and pass-through costs. Q2 EBITDA rose year over year, with significant fair-value and inventory adjustments affecting reported results. Six-month earnings and EBITDA were sharply lower, principally due to the DCP Midstream impairment and volatile derivative valuations.
Six-month capital expenditures were $2.352B; net cash used in investing activities was $2.266B and net cash used in financing activities was $3.124B. Cash and restricted cash ended the period at $497M. The company declared a quarterly common dividend of $0.81 per share, increased 9.8% effective March 1, 2020.
Debt, liquidity and financial position
At June 30, 2020, total assets were $164.694B, total equity was $69.941B, and long-term debt was $63.680B. Including current long-term debt of $3.097B and short-term borrowings of $355M, reported interest-bearing debt was approximately $67.132B, compared with approximately $64.963B at December 31, 2019. Enbridge reported $14.102B of available committed credit facilities and net available liquidity of $14.564B, including unrestricted cash. It was in compliance with debt covenants. Management noted negative working capital excluding current maturities of long-term debt, supported by available liquidity.
Material changes, outlook and management commentary
- COVID-19 and throughput: Average Mainline System volumes were 2,439 kbpd in Q2, about 400 kbpd below Q1 2020. Management expected underutilization of 200–400 kbpd in Q3 and 100–300 kbpd in Q4, with full utilization expected in early 2021. Each 100 kbpd volume change was estimated to affect quarterly revenue, net of power savings, by about $35M.
- Unusual items: Enbridge recorded a $1.736B impairment of its DCP Midstream equity investment and recognized a further $324M share of DCP-related asset and goodwill impairment losses. The DCP distribution to Enbridge was reduced by 50%. Six-month results also included derivative fair-value losses and severance, transition and transformation costs; these items materially affected period comparisons.
- Resilience and financing: Management targeted approximately $300M of 2020 operating-cost reductions, reported about $400M of asset sales, and said liquidity and financing activities supported funding current capital projects and debt maturities through 2021 without capital-market access if needed. The July 2020 issuance of US$1.0B of hybrid subordinated notes occurred after quarter-end.
- Projects and regulation: U.S. Line 3 Replacement permits remained under review, with timing uncertain and potential cost-overrun risk. A 49% sale of an entity holding Enbridge’s interest in two French offshore wind projects was expected to close in Q4 2020, subject to approvals.
- Operational and legal risks: A May rupture on Texas Eastern Line 10 was under investigation, with precautionary integrity assessments underway. Line 5’s east segment remained shut down after an anchor-support issue pending safety assessments. A July court order sought shutdown of Dakota Access Pipeline; an appellate court granted a temporary administrative stay while considering further relief.
- Other pressures: Energy Services faced compressed location and quality differentials and fewer profitable transportation opportunities. Gas Distribution and Storage six-month results were affected by warmer weather and prior-year comparisons. Management said the duration and ultimate business impact of COVID-19 and commodity-market weakness remained uncertain.
Important facts for investors to verify
- Whether Mainline volumes recover in line with management’s Q3, Q4 and early-2021 expectations, and the resulting revenue sensitivity.
- Further changes in DCP Midstream distributions, investment value or impairment exposure.
- Progress, permitting, timing and cost risks for the U.S. Line 3 Replacement Program and other major capital projects.
- Developments affecting Dakota Access, Line 5 and Texas Eastern operations, including any resulting service or financial effects.
- Liquidity, debt levels, refinancing conditions and the company’s ability to maintain its dividend and investment-grade credit profile.