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Enbridge Inc. First Quarter 2020 Results

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   |    Thursday,May 07,2020

Enbridge Inc. reported first quarter 2020 financial results and provided a quarterly business update.

First Quarter 2020 Highlights

  • First quarter GAAP loss of $1,429 million or $0.71 loss per common share, compared to GAAP earnings of $1,891 million or $0.94 per common share in 2019, impacted by certain unusual and infrequent factors, including a non-cash impairment of the Company’s investment in DCP Midstream of $1,736 million and non-cash unrealized derivative fair value losses of $1,956 million
  • Adjusted earnings were $1,668 million or $0.83 per common share for the first quarter of 2020, compared with $1,640 million or $0.81 per common share in 2019
  • Adjusted earnings before interest, income tax and depreciation and amortization (EBITDA) was $3,763 million, compared with $3,769 million in 2019
  • Cash Provided by Operating Activities was $2,809 million, compared with $2,176 million in 2019
  • Distributable Cash Flow (DCF) was $2,706 million, compared with $2,758 million in 2019
  • Reaffirmed financial guidance range for 2020 Distributable Cash Flow per Share of $4.50 to $4.80/share
  • Issued $4 billion of term debt at attractive rates, and added $3 billion of new committed credit facilities, increasing available liquidity to $14 billion
  • Texas Eastern Transmission, LP (Texas Eastern) received approval from the Federal Energy Regulatory Commission (FERC) of its uncontested rate case settlement with customers
  • Reducing operating costs by $300M, including reductions to senior management and Board of Directors’ compensation to further bolster our business resiliency
  • Deferral of approximately $1 billion of planned 2020 secured growth capital spending to reflect refined execution schedules in light of COVID-19
  • Minnesota Public Utilities Commission (PUC) issued its official order confirming the re-certification of the Final Environmental Impact Statement (FEIS), Route Permit and the Certificate of Need for the Line 3 Replacement Project
  • The Pollution Control Agency (PCA) and the U.S. Army Corp of Engineers (USACE) completed their public consultation periods, further advancing Line 3 permitting
  • Filed a joint application for permits to the USACE and Michigan Department of Environment, Great Lakes and Energy (EGLE) to construct the Straits of Mackinac tunnel
  • Reached an agreement to sell 49% of our interest in three offshore Wind projects under development in France to the Canada Pension Plan Investment Board (CPP Investments) for initial proceeds expected to exceed $100 million, and pro-rata contributions for development and construction, going forward
  • Announced $0.3 billion of additional asset divestitures, including the Montana Alberta Tie Line (MATL) power transmission business and the Ozark gas pipeline assets

Al Monaco, President and Chief Executive Officer: “Our responsibility to deliver energy safely and reliably is even more critical in these challenging times. Our pipeline networks assure energy security for North America and the vital fuel supplies that keep our economy and supply chains moving and support the production of equipment and delivery of services needed to fight COVID-19.

“Our teams responded to this unprecedented challenge, quickly and effectively. In January we initiated comprehensive business continuity measures to protect the health of our employees, contractors and the communities we operate in. Our people have once again shown their professionalism and dedication to their work in keeping our critical functions operating safely and reliably in this difficult time.

“While the full economic impact of COVID-19 and pace of global recovery is still uncertain, we’re confident that Enbridge will persevere through the difficult conditions being faced by all of us today. That’s because resiliency has always been a hallmark of how we manage our business; our strategically located assets, diversified cash flows, strong commercial underpinnings, and a strong balance sheet, allow us to withstand economic downturns and stay well-positioned for the future.

“In the first quarter, all our businesses performed well. Despite warmer than normal weather and lower contribution from energy services, our operating and financial results came in better than expected because of record volumes on the Liquids Mainline, strong utilization on our Texas Eastern gas transmission system, and great progress on synergy capture within our Gas Distribution and Storage business.

“We also advanced our strategic priorities this quarter. We sold $0.4 billion of assets, providing more financial flexibility and demonstrating our commitment to capital discipline. We put new rates into effect on Texas Eastern, reflecting the settlement we reached with customers. Finally, in Liquids Pipelines permitting continues to advance on the Line 3 Replacement project, a critical safety and integrity project.

“This solid performance underscores the strength and resiliency of our diversified asset portfolio which will serve us well in the face of the challenges emerging from the global response to the COVID-19 pandemic. However, there’s no doubt that the impacts of the pandemic on society as a whole, and the energy industry, are unprecedented. The global economy has severely contracted and we’re experiencing energy demand disruption on a scale that we haven’t seen before. While Enbridge’s business is resilient and our financial position is strong, we don’t expect to be entirely immune to COVID-19 impacts in the near term.

“Our Liquids Mainline system has historically operated at or close to full capacity, generating highly predictable cashflows through commodity cycles, industry downturns and financial market disruptions; in fact, the Mainline has been apportioned for several years. However, the large and rapid decline in gasoline and jet fuel consumption, brought about by COVID-19, has resulted in sharp cuts to refinery runs and crude oil production. We’ve started to see some impacts on the Mainline: throughput was down approximately 400 thousand barrels per day in April, compared to average Q1 throughput of 2.84 million barrels per day. We expect similarly lower utilization rates will likely continue through the end of the second quarter.

“We currently believe that volumes will recover in the second half of the year as COVID-19 related travel restrictions are slowly lifted and mobility gradually returns to North America in the third and fourth quarter of this year. This view is supported by our belief that that the refineries operating in our core Mainline markets (i.e. the U.S. Midwest, Eastern Canada and the U.S. Gulf Coast) will be among the first to ramp back up given their scale, complexity and cost competitiveness.

“With the near-term reduction in Mainline volumes (Mainline accounts for 30% of EBITDA), it’s important to remember that Enbridge’s cash flows are well diversified across many businesses, geographies and have strong commercial structures. For instance, at this time, the financial performance of our Gas Transmission, Gas Distribution and Storage, and Renewable Power businesses is not expected to experience a meaningful impact from COVID. Our Gas Transmission business accounts for about 30% of 2020 expected EBITDA and is anchored by utility customers with firm reservation-based load which is expected to remain relatively stable.

“Revenues from our Gas Distribution utility and Power businesses account for approximately 17% of 2020 expected EBITDA and are underpinned by strong regulatory and contractual frameworks and predominately derived from a large and diversified residential customer base whose utilization rates are not expected to be impacted materially by the pandemic.

“While results from a few of our smaller businesses with direct commodity exposure (accounting for approximately 3% of EBITDA), such as Energy Services, DCP Midstream and our Aux Sable fractionation business, are likely to be weaker than budgeted, we also expect upside to our full year financial forecast from lower interest rates and a weaker Canadian dollar that improves translated results of our significant U.S. cash flows.

“We’ve initiated additional actions to further bolster our resiliency, while assuring that the safety and reliability of our operations remains our first priority. After a comprehensive review of our operating expenditures, we plan to reduce 2020 costs by approximately $300 million. These actions include company-wide compensation reductions, including for myself, the Board of Directors, and the rest of the management team. In addition, we’ve already increased our excess liquidity to $14 billion, which ensures we can fund our capital program well into 2021, even in the absence of further access to debt capital markets. Finally, we’re deferring about $1 billion of 2020 secured growth capital spending to reflect refined execution schedules in light of COVID-19.

“Our full year financial performance will be impacted by the degree and pace of recovery of Mainline throughput. However, given the strength and stability of our broader business portfolio, and accounting for our current assessment of headwinds, tail winds and cost reduction actions, we continue to expect to generate DCF within our original guidance range of $4.50 to 4.80 per share.

“Finally, we remain focused on executing our $10 billion 3-year (2020 – 2022) secured growth capital program, of which approximately $5.5 billion remains to be spent (net of project level financing). Once in service, these low risk, highly capital efficient organic projects will drive solid growth over the near to medium term and advance our strategic priorities. Importantly, the actions we’ve taken to bolster our balance sheet and liquidity provides us with the continued financial flexibility to self-fund this growth.”

Financials

GAAP earnings attributable to common shareholders for the first quarter of 2020 decreased by $3,320 million or $1.65 per share compared with the same period in 2019. The period-over-period comparability of earnings attributable to common shareholders was impacted by certain unusual, infrequent factors or other non-operating factors, including a non-cash impairment of the Company’s investment in DCP Midstream of $1,736 million and non-cash unrealized derivative fair value losses of $1,956 million, which are noted in the reconciliation schedule included in Appendix A of this news release.

Adjusted earnings in the first quarter 2020 increased by $28 million and on a per share basis by $0.02. The increase was primarily driven by a reduction in earnings attributable to non-controlling interests (NCI) and lower current income taxes, offset by increased depreciation expenses on new assets put into service throughout 2019 and increased interest expense as a result of debt issued to fund capital expenditures as well as the reduction in capitalized interest associated with the Canadian portion of Line 3 which was put into service in the fourth quarter of 2019.

DCF for the first quarter was $2,706 million, a decrease of $52 million over the first quarter of 2019 driven largely by the operating factors noted above. These factors are discussed in detail under Distributable Cashflow.

Detailed segmented financial information and analysis for the first quarter 2020 can be found below under Adjusted EBITDA by Segments.

Project Updates

Enbridge currently has under development $10 billion of secured growth capital projects, net of the sale of 49% of our interest in the Saint Nazaire offshore wind project announced today. Once in service, these projects will provide approximately $2.5 billion of incremental cash flows and drive highly transparent growth over the near to medium term horizon. Approximately $5.5 billion of the secured growth capital program remains to be spent through 2022, net of anticipated project level financing provided by third parties.

The individual projects that make up the secured program are all supported by long-term take-or-pay contracts, cost-of-service frameworks or similar low-risk commercial arrangements and are diversified across a wide range of business platforms and regulatory jurisdictions.

The Company is experiencing a natural slowing of 2020 secured growth capital spending in light of the COVID-19 pandemic and the health and safety measures put place by federal and regional governments. After a review of capital execution schedules, it’s expected that 2020 expenditures will be approximately $1 billion lower than budgeted. The deferred capital will be shifted into 2021, and it’s anticipated that the impact to in-service dates will be immaterial as scheduling efficiencies and contingencies are largely expected to offset delayed spending.

On April 22, the Sabal Trail Pipeline Phase 2 expansion project received FERC approval for the additional capacity and on May 1 was placed into service. The project is underpinned by long-term take-or-pay contracts. Enbridge holds a 50% interest in the Sabal Trail Pipeline, and its investment in the expansion project is $0.1 billion.

The Company also announced a transaction with CPP Investments to sell 49% of its 50% interest in the Saint Nazaire offshore wind project off the coast of France, which reached a positive final investment decision in 2019. This transaction reduces the Company’s equity investment in the Saint Nazaire project to $0.2 billion from $0.3 billion and reduces the Company’s secured capital program (inclusive of the Company’s proportionate share of project level financing) to $0.9 billion from $1.8 billion. It’s expected the transaction will improve the Company’s equity returns from the project, reflecting a continued emphasis on disciplined capital allocation. The transaction is discussed more fully in the Update on Financing Activities and Asset Sales section below.

Line 3 Replacement

The $9 billion Line 3 Replacement Project is a critical integrity replacement project that will enhance the continued safe and reliable operations of our Mainline System well into the future and reflects the importance of protecting the environment.

The $5 billion Canadian segment of the pipeline replacement was placed into service on December 1, 2019, with an interim surcharge of $US$0.20 per barrel.

On the U.S. segment of the project, in Minnesota, the MPUC approved the adequacy of the FEIS and reinstated the Certificate of Need and Route Permit, allowing for construction of the pipeline to commence following the issuance of required permits. State and Federal environmental agencies are advancing the permitting process, including the issuance of the draft 401 Water Quality Certification by the Minnesota Pollution Control Agency, as well as the completion of the relevant public consultation processes. According to the PCA permitting schedule, the next critical phase is focused on the PCA reviewing and considering public comments before making a certification decision.

At this time, Enbridge cannot determine when all necessary permits to commence construction will be issued. Depending on the final in-service date, there is a risk that the project may exceed the Company’s total cost estimate of $9 billion for the combined Line 3 Replacement Project. However, a significant portion of the capital spend relates to the Canadian segment of the Line 3 replacement project, which is currently in service and came in slightly below budget at around $5 billion. At this time, the Company does not anticipate any capital cost impacts that would be material to Enbridge’s financial position and outlook.

Business Updates

Company Cost Reduction Actions
The Company has initiated actions to reduce costs by approximately $300 million in 2020. The actions will not impact the safety and reliability of our operations, which remains our number one priority. The cost management program will include reductions to outside services and supply chain costs, company-wide salary rollbacks and a voluntary workforce reductions program. Salary rollbacks include a 10% reduction for the Executive Leadership Team and a 15% reduction for the President & Chief Executive Officer and the Board of Directors. These actions bolster Enbridge’s resilience and align with the interests of our stakeholders.

Mainline Contracting
On December 19, 2019, the Company submitted an application to the Canada Energy Regulator (CER) to implement contracts on the Liquids Canadian Mainline System. The application for contracted and uncommitted service included the associated terms, conditions and tolls for each service, which would be offered in an open season following approval by the CER. The tolls and services will replace the current Competitive Toll Settlement (CTS) that is in place until it expires on June 30, 2021. If a replacement agreement is not in place by that time, the CTS tolls will continue on an interim basis.

The application that the Company filed is the result of two years of extensive negotiations with a diverse group of shippers and has been designed to align the interests of its shippers and Enbridge. Shippers representing approximately 75% of the current Mainline system throughput have filed letters supporting the application with the CER demonstrating the strong shipper backing for the offering.

The application highlights the benefits of the Mainline contract offering for both shippers and the public, including the following:

  • Secures long-term demand for Western Canadian Sedimentary Basin (WCSB) heavy and light barrels in premium markets;
  • Supports the best netbacks for WCSB producers;
  • Competitive and stable tolls for customers; and
  • Flexibility for shippers of all types and sizes to participate by offering both a traditional take-or-pay and producer and refiner requirements contracts.

On February 24, 2020, the CER issued a Notice of Public Hearing which outlined the process for participation in the hearing and identified a list of issues for discussion in the proceeding.

In March, letters were filed with the CER by a group of potential intervenors that requested the CER delay setting hearing dates associated with the Mainline contract filing. Subsequently, the CER issued a letter requesting comments on the potential delay of proceedings. Enbridge filed its response with the CER on May 1, 2020, submitting that the CER should proceed with issuing a hearing order and not delay the proceedings as the written portion does not require physical gatherings and the oral portion is not likely to occur until the fall.

Line 5 Tunnel

As part of Enbridge’s agreement with the State of Michigan, the Company plans to replace its existing Line 5 dual pipelines at the Straits of Mackinac with a pipeline secured in an underground tunnel, under the Straits, making a safe pipeline even safer. In 2019, the Company completed geotechnical work which supports the suitability of this state-of-the-art tunnel, with enhanced safety features, and further demonstrates Enbridge’s commitment to protecting Michigan and the Great Lakes’ natural resources. Enbridge has filed for all major environmental permits, including the Joint Permit Application with the EGLE and the USACE, as well as an independent application to the Michigan Public Service Commission.

The joint application covers permit requirements from both state and federal agencies and allowing for the simultaneous review of permitting activities by both agencies.

Upon receipt of all required permits, Enbridge expects to begin construction of the Line 5 tunnel, with the expected completion of construction, testing and commissioning to be completed sometime in 2024.

Gas Transmission and Midstream Rate Cases

In February, the Company received approval from the FERC of its uncontested rate case settlement between Texas Eastern and its customers, further optimizing the base business. Upon approval, Texas Eastern recognized revenues in the first quarter of 2020 reflecting settlement terms and put into effect its settled rates on April 1, 2020.

Financing Update & Asset Sales

In the first quarter of 2020, prior to the debt capital market disruption, the Company secured over $3 billion of debt financing at attractive rates, including a US$750 million floating rate note and US$1.5 billion of bank term loans. Proceeds were used to re-finance maturing debt and fund new growth projects. Subsequent to the first quarter, Enbridge Gas Inc. was one of the first corporate issuers back in the Canadian debt capital markets given its low risk business model and strong credit rating. It issued 10-year and 30-year notes for total proceeds of $1.2 billion at a weighted average coupon of 3.3%, representing the largest Enbridge Gas Inc. offering to date.

In addition, Enbridge secured $3 billion of new committed credit facilities which further increased the Company’s available liquidity to over $14 billion. This liquidity position provides significant financial flexibility and would be more than sufficient to meet the Company’s financing needs, net of internally generated cash flows, through 2021 in the absence of further capital markets access.

The Company continues to maintain strong leverage ratios, and expects that its Debt to EBITDA metric will remain well within its target range of 4.5x to 5.0x through 2020.

On April 1, 2020, the Company closed the sale of our Ozark Gas Transmission and Ozark Gas Gathering assets for proceeds of approximately $0.1 billion. In addition, on May 1, 2020, Enbridge closed the previously announced sale of our Montana-Alberta Tie Line transmission assets for proceeds of approximately $0.2 billion.

On May 1, 2020, the Company and CPP Investments executed agreements whereby 49% of the Company’s 50% interest in Éolien Maritime France SAS (EMF) will be sold to CPP Investments in return for a payment which will include a project promote as well as 49% of all development capital spent by Enbridge since inception to the date of close. The total payment at close is anticipated to exceed $100 million. Post closing, CPP Investments will contribute its pro-rata 49% share of all ongoing future development capital. Completion of the transaction is subject to customary regulatory approvals and is anticipated to close in the fourth quarter of 2020. After the transaction closes, through the Company’s investment in EMF, Enbridge will own equity interests in three French offshore wind projects, including, Saint Nazaire (25.5%), Fecamp (17.9%), and Courseulles (21.7%).

In 2019, the Saint Nazaire offshore wind project reached a positive final investment decision while the remaining projects are expected to reach a final investment decision by next year.

These divestiture transactions, which total $0.4 billion, further strengthen the Company’s financial position and highlight its disciplined approach to capital allocation.

First quarter 2020 DCF decreased $52 million compared with the same period of 2019. Key performance drivers of quarter-over-quarter decline included:

  • Lower Adjusted EBITDA reflecting strong operating performance from Liquids Pipelines and Gas Transmission and Midstream assets and contributions from new assets placed into service in 2019, offset by the absence of contributions from the federally regulated Canadian natural gas gathering and processing business sold on December 31, 2019, lower EBITDA from Energy Services due to narrowing of certain crude oil location and quality differentials, and lower adjusted EBITDA from Gas Distribution and Storage due to warmer weather in the first quarter of 2020 when compared with the first quarter of 2019.
  • Higher maintenance capital due the timing of maintenance spending at the end of 2019 that carried over into the first quarter of 2020.
  • Higher interest expense due to a combination of additional of new debt incurred to fund capital expenditures as well as a reduction in capitalized interest associated with the Canadian portion of Line 3 which was placed into service in December 2019, partially offset by lower rates on short term debt and newly issued long term notes.

 

Partially offsetting the factors noted above was lower current income tax due newly enacted Canadian tax legislation coming into effect in the second half of 2019.

In the first quarter of 2020, DCP Midstream, LP (DCP) announced it would reduce its quarterly distribution by 50%, beginning with the first quarter distribution which will be paid in May. Enbridge’s DCF in the first quarter of 2020 includes DCP’s distribution from the fourth quarter of 2019 which was declared and paid prior to the DCP’s announced distribution reduction.

 Adjusted earnings increased $28 million and adjusted earnings per share increased $0.02 compared with the first quarter in 2019. Growth in adjusted earnings was driven by the same factors impacting business performance and adjusted EBITDA as discussed under Distributable Cash Flow above, partially offset by the following factors:

  • Higher depreciation and amortization expense as a result of new assets placed into service throughout 2019.
  • Higher interest expense due to debt issued to fund new growth capital as well as a reduction in capitalized interest associated with the Canadian portion of Line 3 which was placed into service in December 2019, partially offset by lower rates on short term debt and newly issued long term notes.
  • Lower income taxes primarily due to lower adjusted earnings before income taxes.
  • A positive impact to NCI as a result of tax equity adjustments on certain onshore wind farms.

The increase in the weighted average outstanding common shares did not have a significant impact on adjusted earnings per common share.

EBITDA by Segment

Adjusted EBITDA by segment is reported on a Canadian dollar basis. Adjusted EBITDA generated from U.S. dollar denominated businesses was translated at a higher average Canadian dollar exchange rate in the first quarter of 2020 (C$1.35/US$) when compared with the corresponding 2019 period (C$1.33/US$).

A portion of the U.S. dollar earnings is hedged under the Company’s enterprise-wide financial risk management program. The offsetting hedge settlements are reported within Eliminations and Other.

Liquids Pipeline

Liquids Pipelines adjusted EBITDA increased $190 million compared to the first quarter of 2019 primarily as a result of the following factors:

  • Mainline System adjusted EBITDA increased driven by higher throughput as a result of continued optimizations of the system, as well as a higher period-over-period IJT. In addition, the Mainline System benefited from incremental contributions from the Canadian portion of the Line 3 Replacement project that was placed into service on December 1, 2019, with an interim surcharge on Mainline volumes of US$0.20 per barrel.
  • Gulf Coast and Mid-Continent System growth was driven by strong demand for spot volumes on the Flanagan South Pipeline due to refinery outages in the Midwest U.S. The Gray Oak Pipeline project commenced service late in the fourth quarter of 2019 and provided modest contributions in the first quarter of 2020 with volume expected to ramp up in the second quarter of 2020.
  • Other adjusted EBITDA increased due primarily to higher volumes on the Dakota Access Pipeline.

Gas Transmission & Midstream

Gas Transmission and Midstream adjusted EBITDA increased $57 million compared to the first quarter of 2019 primarily due to the following factors:

  • US Gas Transmission adjusted EBITDA increased primarily due to higher revenues from updated rates on Texas Eastern resulting from the recent rate case settlement and following the FERC approval, the Company recognized in revenue interim rates collected from shippers since June 1, 2019. In addition, various US Transmission assets were placed into service after the first quarter of 2019 including Atlantic Bridge Phase 2 and Stratton Ridge. These increases were partially offset by higher planned integrity expenditures.
  • Canadian Gas Transmission adjusted EBITDA decreased primarily due to the absence of adjusted EBITDA contributions from federally regulated Canadian gas gathering and processing assets that were sold on December 31, 2019. Further, contributions from the Alliance Pipeline are also lower driven by narrowing of the AECO-Chicago basis.

Distribution & Storage

Gas Distribution and Storage adjusted EBITDA will typically follow a seasonal profile. It is generally highest in the first and fourth quarters of the year reflecting greater volumetric demand during the heating season and lowest in the third quarter as there is generally less volumetric demand during the summer. The magnitude of the seasonal EBITDA fluctuations will vary from year-to-year reflecting the impact of colder or warmer than normal weather on distribution volumes.

Gas Distribution and Storage adjusted EBITDA decreased $84 million compared to the first quarter of 2019 primarily due to warmer weather in EGI’s franchise areas which led to lower utilization. The warmer weather in the first quarter of 2020 when compared with the normal weather forecast embedded in rates negatively impacted adjusted EBITDA by approximately $41 million while first quarter 2019 EBITDA was positively impacted by colder than normal weather by approximately $33 million. This decrease in adjusted EBITDA was partially offset by higher distribution charges resulting from increases in customer base, as well as synergy captures realized from the amalgamation of Enbridge Gas Distribution Inc. and Union Gas Limited. Other Gas Distribution and Storage adjusted EBITDA decreased due to closing of the sale of Enbridge Gas New Brunswick on October 1, 2019, and St. Lawrence Gas Company, Inc. on November 1, 2019.


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