GAAP earnings attributable to common shareholders increased by $882 million or $0.47 per share for the fourth quarter of 2018 and decreased by $14 million or $0.20 per share for the year ended 2018 compared to the same periods in 2017. In addition to the factors discussed in Adjusted Earnings below, the year-over-year and fourth quarter-over-quarter comparability of GAAP earnings attributable to common shareholders were impacted by a number of unusual, non-recurring or non-operating factors, which are noted in the reconciliation schedules included in Appendix A of this news release.
Adjusted earnings in the fourth quarter of 2018 increased by $153 million or $0.04 per share compared to the same period in 2017. The increase was primarily driven by strong operating results and operating cost efficiencies across many of the Company's business units, new projects coming into service in the Liquids Pipelines, Gas Transmission and Midstream, Green Power and Transmission and Gas Distribution segments since the fourth quarter of 2017 and synergy realization from the Spectra Energy acquisition.
Adjusted earnings for the year ended 2018 increased by $1,586 million or $0.69 per share compared to the same period in 2017. The increase is in large part due to the timing of the merger with Spectra Energy Corp (the Merger Transaction) which closed on February 27, 2017.
DCF for the fourth quarter of 2018 was $1,863 million and for the year ended 2018 was $7,618 million, increases of $122 million and $2,004 million respectively over the comparable prior periods in 2017, driven largely by the same factors noted above.
Detailed segmented financial information and analysis can be found below under Adjusted EBITDA by Segments.
PROJECT EXECUTION UPDATE
In 2018, the Company completed $7 billion of growth projects, substantially on time and on budget. These were comprised of almost a dozen projects across all business units, including expansions to the existing Canadian and US gas transmission systems, the Company's first European offshore wind project and ongoing capital investment to support customer growth within the utility franchises. Most recently in the fourth quarter, the US$1.3 billion (Enbridge's share) NEXUS and the associated US$0.2 billion TEAL natural gas pipeline projects were brought into service, providing much needed export capacity out of the Marcellus and Utica basins into the upper Midwest and Eastern Canadian markets. In addition, the US$1.6 billion Valley Crossing natural gas pipeline project entered service on October 31. All of these pipeline projects are underpinned by long-term take-or-pay transportation contracts.
Enbridge continues to make good progress executing the remainder of its secured growth capital program. The Company has a $16 billion inventory of secured projects at various stages of execution which are scheduled to come into service between 2019 and 2023. 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 largest being the Line 3 Replacement Project as discussed below.
LINE 3 REPLACEMENT UPDATE
The $9 billion Line 3 Replacement Project is a critical integrity replacement project that will enhance the safety and reliability of the Enbridge Liquids Mainline System and provide incremental export capacity to Western Canadian producers and increased security of supply for key refining markets along the Mainline system as well as to markets further downstream.
Several important milestones were achieved in 2018. In Canada, the entire 1,100 kilometers of pipeline has now been laid and remaining construction activities on pump stations and terminal tie-ins are on schedule for completion by mid-2019. In the U.S., the pipeline replacement work in Wisconsin was completed and has been placed into service.
In Minnesota, the MPUC approved the Certificate of Need and Route Permit and denied petitions to reconsider the decisions. All related Certificate conditions have been finalized and are being addressed. In addition, agreement was reached with the Fond du Lac Band of Lake Superior Chippewa granting a new 20 year easement for the entire Mainline including the Line 3 Replacement Project through their Reservation. The remaining permit applications have been submitted to the various federal and state agencies, including the U.S. Army Corps of Engineers, the Minnesota Department of Natural Resources, the Minnesota Pollution Control Agency and other local government agencies in Minnesota. The Company anticipates that the agencies will process all of these applications in the coming months, and with timely approvals continues to expect an in-service date for the project before the end of 2019.
OTHER BUSINESS UPDATES
On October 15, 2018, the Company announced that it was moving forward with the amalgamation of Enbridge Gas Distribution Inc. and Union Gas Limited, its two natural gas utility franchises in Ontario. The amalgamation, under the terms of a new Ontario Energy Board approved incentive rate regulation framework, took effect January 1, 2019. This will enable significant efficiencies in operations benefiting both ratepayers and shareholders while maintaining a focus on the safe and reliable distribution of energy.
On December 11, 2018, the Company announced $1.8 billion of new accretive growth capital investments:
- Gray Oak Pipeline - Enbridge will invest US$600 million for a 22.75% interest in the Gray Oak Liquids Pipeline, which will deliver light crude oil from the Permian Basin to Corpus Christi and other markets. Gray Oak, currently under construction, is expected to begin service in late 2019, contribute to the post-2020 growth outlook and is an important component of Enbridge's broader emerging U.S. Gulf Coast liquids infrastructure strategy.
- Cheecham Terminal & Pipeline - Enbridge has acquired existing liquids pipeline and terminal assets connected with Athabasca Oil Corporation's Leismer SAGD oil sands assets for $265 million. The assets are synergistic as they are connected with Enbridge's existing terminal and pipeline assets in the region.
- Gas Transmission Expansions - Enbridge will invest approximately $800 million on four Gas Transmission expansion projects coming into service in the 2020-23 timeframe. The Vito Offshore Pipeline will provide service to Shell's offshore Gulf Coast operations. The Cameron Lateral expansion project will connect Texas Eastern with Gulf Coast LNG export facilities. In addition, the Gulfstream and Sabal Trail Pipelines into Florida will both undergo additional expansion (Phase VI and Phases 2 & 3 respectively). All of these expansion projects are underpinned by long-term take-or-pay commercial arrangements.
In January 2019, the Company secured an additional $0.3 billion of attractive and low-risk pipeline and utility growth capital projects:
- East-West Tie Transmission Project (EWT) - Enbridge has partnered with an industry leading transmission developer to construct a transmission line that will add capacity between Wawa and Thunder Bay to support electricity supply to Northeast Ontario. The EWT project recently received the exclusive right from the Province of Ontario to proceed to construct and also received the leave to construct approval from the Ontario Energy Board in February 2019. Enbridge currently has a 25% equity interest in EWT and plans to invest approximately $0.2 billionfor its share of the project. The project is supported by a cost of service framework and is expected to be in service in late 2021.
- Generation Pipeline - Enbridge, through its investment in Nexus, announced an attractive investment to acquire Generation Pipeline, a 355 million cubic feet a day pipeline that will interconnect with Nexus. Enbridge's share of the acquisition is approximately US$0.1 billion and the pipeline is fully contracted with long term arrangements. This acquisition offers additional opportunity to expand the Company's footprint to supply natural gas to power generation and industrial customers in Northern Ohio.
SIMPLIFICATION OF CORPORATE STRUCTURE
In the fourth quarter, the Company acquired, in separate combination transactions, all of the outstanding equity securities of Enbridge Income Fund Holdings Inc. (ENF), Enbridge Energy Partners, L.P. (EEP), Enbridge Energy Management, L.L.C (EEQ), and Spectra Energy Partners, LP (SEP) not beneficially owned by Enbridge. The buy-ins are strategically and economically attractive Enbridge shareholders and provide substantial benefits, including:
- Increased ownership in its core businesses and further enhancement of its industry-leading, low-risk profile
- Significant advancement of Enbridge's strategy to simplify and streamline its corporate structure which further increases the transparency of its strong cash generating assets
- Higher retention of cash generated from the assets, which will support continued strong dividend coverage and self-funded growth
- An improved Enbridge credit profile due to the elimination of sponsored vehicle public distributions as well as the reduction of the structural subordination of Enbridge's parent company debt
- Significant benefits to Enbridge's post 2020 outlook primarily due to tax optimization synergies
ASSET SALE AND FINANCING UPDATE
The Company reached agreements to sell over $7.8 billion of non-core assets in 2018, well in excess of the $3 billiontargeted in the financing plan. The Company has now received proceeds from asset sales of approximately $5.7 billion, with the balance expected by mid-2019. These proceeds will provide the Company with significant additional financial flexibility to further strengthen the balance sheet and fund the secured growth program. As of the end of the year, the Company's consolidated Debt to EBITDA ratio was 4.7x on a trailing twelve month basis. This is in line with its updated long term target credit metric range of 4.5x to comfortably below 5.0x Debt to EBITDA.
On January 25, 2019, Moody's Investors Service announced that it had upgraded Enbridge Inc.'s senior unsecured debt rating to Baa2 with a positive outlook. Each of Standard & Poors, Fitch and DBRS have recently reaffirmed Enbridge Inc.'s senior unsecured debt rating at BBB+, BBB+ and BBB High, respectively.
Given the progress on leverage reduction, the Company announced in the fourth quarter that it would suspend its DRIP effective with the dividend payment on December 1, 2018, which was earlier than originally contemplated. With this action, the Company has now moved to a fully self-funded financing model and will no longer require external equity to support its growth program going forward.
The sponsored vehicle buy-ins have also provided an opportunity to simplify the Company's debt financing structure and strategy. A number of actions have been taken:
- Completion of a debt exchange on December 21, 2018 whereby $1.6 billion of term debt securities issued by Enbridge Income Fund (the Fund) were exchanged for notes of Enbridge Inc. with identical coupons and terms to maturity; the Company intends to discontinue external debt financing by the Fund
- The amendment of certain covenants in the EEP and SEP trust indentures and entry into a subsidiary guarantee agreement on January 22, 2019 to implement a "cross guarantee" arrangement whereby remaining outstanding senior term debt obligations of EEP and SEP are guaranteed by Enbridge Inc. and each of SEP and EEP correspondingly guarantee Enbridge Inc.'s senior term debt obligations; the Company intends to discontinue external debt financing by both EEP and SEP
- The redemption of US$400 million of EEP junior subordinated notes which is expected to be completed by the end of February 2019
The Company believes that these changes to its debt funding structure and financing strategy has substantially reduced structural subordination, will further enhance the credit profile of the consolidated Enbridge group and reduce its cost of capital over the longer term.
GUIDANCE AND LONGER TERM GROWTH OUTLOOK
At its December 2018 investor conference, Enbridge highlighted that its key strategic priorities for 2019 and beyond remain largely unchanged:
- Focusing on the safety, operational reliability and environmental performance of the systems and ensuring cost effective and efficient transportation for our customers;
- Ensuring strong execution of the secured capital program that will drive DCF per share growth through 2020;
- Concentrating on growth of core businesses through extensions and expansions of the liquids pipeline, natural gas transmission and gas utility franchises to extend growth beyond 2020;
- Maintaining a strong financial position and flexibility as secured growth projects are brought on line;
- Continuing to exercise rigorous capital allocation to maximize shareholder value
The Company further re-iterated its guidance for the mid-point of the projected range of 2019 and 2020 DCF per share of $4.45 per share and $5.00 per share, respectively. With this robust outlook, Enbridge has announced a 10% dividend increase for 2019 and anticipates another 10% increase for 2020. The 2019 quarterly dividend of $0.738 per share will be payable on March 1, 2019, to shareholders of record on February 15, 2019.
Beyond 2020, Enbridge is targeting to achieve annual DCF per share growth in the range of 5%-7%, driven by an attractive suite of organic growth prospects within its three core businesses that can be self-funded using available cash generated by these businesses and managing leverage within targets designed to maintain strong investment grade credit ratings.