Enbridge Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise noted, amounts are in millions of Canadian dollars; per-share amounts are Canadian dollars. Enbridge operates liquids pipelines, gas transmission and midstream, gas distribution, renewable power and energy services businesses.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $12,856 | $12,726 |
| Operating income | $2,619 | $878 |
| Earnings attributable to common shareholders | $1,891 | $445 |
| Diluted earnings per common share | $0.94 | $0.26 |
| Segment EBITDA | $4,132 | $1,917 |
| Cash from operating activities | $2,176 | $3,194 |
| Capital expenditures | $1,612 | $1,635 |
Segment EBITDA is a non-GAAP measure as presented in management’s discussion. Reported earnings rose substantially, but the comparison includes significant unusual items and non-cash derivative valuation movements; it should not be read as equivalent growth in recurring operating performance.
Balance sheet and liquidity
- At March 31, 2019, total assets were $166.5 billion and total equity was $73.9 billion.
- Short-term borrowings were $870 million, current long-term debt $4.321 billion, and long-term debt $60.680 billion. Debt capitalization was 47.1%, versus 46.8% at year-end 2018.
- Cash and cash equivalents were $702 million; restricted cash was $55 million. Net available liquidity was $7.241 billion, down from $9.409 billion at December 31, 2018. Committed credit facilities had $6.539 billion available.
- Management reported compliance with debt covenants. Working capital was negative, excluding current maturities of long-term debt; the filing cites funding of the growth capital program as a major factor.
- Common dividends paid were $1.486 billion. The board declared a quarterly common dividend of $0.738 per share, payable June 1, 2019.
Material changes and drivers
- Common earnings increased $1.446 billion year over year. Management attributed $1.181 billion of the improvement to unusual, infrequent or other factors, including the absence of 2018 impairments on MOLP and Line 10 and higher unrealized derivative gains in 2019. Severance and transition costs were lower; the absence of a 2018 U.S. tax benefit partly offset the increase.
- After these factors, management cited stronger liquids pipeline contributions from higher tolls and throughput, new gas transmission assets, colder weather and higher rates/customer numbers in gas distribution, and improved Energy Services crude margins. These gains were partly offset by earnings lost from businesses sold in 2018 and higher income tax expense.
- Operating cash flow fell by $1.018 billion, primarily due to changes in operating assets and liabilities, partly offset by stronger segment contributions and new assets in service. Investing cash outflow was $2.148 billion; financing provided $99 million, including increased commercial-paper and credit-facility draws.
- Segment EBITDA was $2.072 billion for Liquids Pipelines, $1.020 billion for Gas Transmission and Midstream, $662 million for Gas Distribution, $124 million for Renewable Power, and $6 million for Energy Services; Eliminations and Other contributed $248 million.
Outlook, projects and risks
- U.S. Line 3 Replacement Program: Minnesota’s remaining state environmental permits were expected by November 2019, with federal permits anticipated 30–60 days later. Enbridge expected service in the second half of 2020 and was revising its construction schedule and cost estimates. U.S. construction costs were above budget due to permitting delays; the total Line 3 program could exceed its $9 billion estimate, depending on the final in-service date. Canadian costs were tracking below budget.
- Other major project schedules include Gray Oak in Q4 2019, Atlantic Bridge’s remaining work through 2020, and Spruce Ridge and Dawn-Parkway in the second half of 2021. Project estimates and dates remain subject to approvals, construction costs and other risks.
- Planned divestitures included the federally regulated Canadian gas gathering and processing facilities, expected to close in mid-2019 for approximately $1.8 billion, and Enbridge Gas New Brunswick, expected to close in 2019 for $331 million subject to adjustments and approvals. Other announced asset sales were also pending approvals or closing conditions.
- Legal and regulatory matters include challenges concerning the Dakota Access Pipeline and uncertainty over Michigan’s Line 5 tunnel authorization after the state attorney general found the enabling law unconstitutional. Management said ordinary-course proceedings were not expected to materially affect consolidated results or financial position, but outcomes cannot be predicted with certainty.
- Management noted market, regulatory, project execution, commodity, foreign-exchange and interest-rate risks. It said the long-term hedging program supports cash-flow reliability but can create significant short-term reported earnings volatility. The filing does not provide a clear consolidated full-year earnings or EPS guidance figure.
Important facts for investors to verify
- How much of the reported earnings increase reflects recurring operating performance versus impairments absent from the comparison period and unrealized derivative gains?
- Whether the U.S. Line 3 permits, revised schedule and final costs remain consistent with the second-half 2020 in-service target and the total program estimate.
- Progress and proceeds from pending divestitures, and the effect of sold assets on future earnings and cash generation.
- Whether operating cash flow, leverage and available liquidity remain adequate to fund dividends, debt maturities and the growth-project program.
- Developments in the Dakota Access and Michigan Line 5 matters, and any resulting operational, permitting or financial consequences.