Suncor has announced a multi-year strategic alliance with Microsoft Canada as a part of the company's effort to further accelerate its digital transformation journey. Suncor has selected Microsoft as its strategic cloud provider, tapping into the full range of Microsoft's cloud solutions to empower a connected and collaborative workforce, upgrade data centres, and increase analytics capabilities. Suncor will also collaborate with Microsoft on innovation projects, drawing on expertise and opportunities from both organizations.
Enbridge Inc. has reported its third quarter 2019 financial results and provided a quarterly business update.
"We delivered another strong quarter of operating and financial results," commented Al Monaco, President and Chief Executive Officer of Enbridge. "The continued strength of our operating performance reflects the quality and predictability of our business model. Once again, we saw strong throughput on our Mainline system during the quarter, with demand for crude volumes out of Western Canada and the Bakken through to U.S. Gulf Coast markets. In addition, our gas transmission business remained in high demand and our Ontario gas utility continued to realize operating synergies following the amalgamation earlier this year.
"Record third quarter EBITDA and DCF was further bolstered by reliable and growing cash flow from new capital projects placed into service over the past year. As a result, we remain confident in achieving our financial guidance for 2019, despite the delay of the Line 3 Replacement Project, with full year results expected to exceed the midpoint of our 2019 DCF guidance range of $4.30 to $4.60 per share.
"In addition to delivering strong financial results, we advanced key initiatives in each of our business units during the quarter. In Liquids Pipelines, we've reached commercial agreement to place the Canadian portion of the Line 3 Replacement Project into service later this year, which will further enhance the safety and reliability of our Mainline system.
"Liquids Pipelines is also moving forward with around 100 kbpd of optimizations that we'll be implementing by year end and in addition to that we have successfully completed an open season supporting a 50 kbpd expansion of the Express Pipeline. Together, these actions provide much needed additional takeaway capacity out of the WCSB.
"On the U.S. portion of our Line 3 Replacement Project, the Minnesota Supreme Court rejected the remaining appeals on the EIS, and the MPUC has now directed the Minnesota Department of Commerce to complete the necessary spill modelling work to remediate the EIS. We're pleased that this regulatory process is moving forward so we can bring this integrity replacement project into service as soon as possible.
"On our Liquids Mainline contract offering, the CER's decision, despite 18 months of negotiations with customers which resulted in substantial capacity commitments from shippers, was a significant departure from precedent. We continue to have strong support for a priority access offering from shippers, including refiners, producers and marketers that represent a significant majority of current throughput. Our Mainline system provides a vital connection for these shippers serving over 3 mbpd of refining demand and downstream contracted capacity. The Mainline provides the most economic tolls to the best markets, resulting in the strongest netback for Western Canadian crude. We remain committed to our offering and plan to file an application to the regulator as soon as practical.
"Within the Gas Transmission business, we filed a settlement agreement with the FERC on the Texas Eastern rate case and continue to advance rate case discussions on the Algonquin systems, further optimizing our base business. In addition to recently announced U.S. Gulf Coast LNG pipeline projects, we entered into a MOU to jointly pursue the development of the Rio Bravo Pipeline and other natural gas pipelines in South Texas to move natural gas to NextDecade's Rio Grande LNG project in Brownsville, TX. We continue to see significant opportunities to expand and extend our competitively positioned gas pipeline network to serve the U.S. Gulf Coast LNG market.
"Execution of our $19 billion secured growth capital program remains on track. This includes our US$0.7 billion investment in the Gray Oak pipeline, stretching from the Permian and Eagle Ford to the Texas Gulf Coast, which is expected to come into service before the end of the year and our $1.1 billion Hohe See offshore wind power project in Germany which has now completed installation of all turbines and the facility is expected to be fully operational in the fourth quarter.
"On the financing front, we've raised over $4 billion of term debt at favourable rates in the Canadian and U.S. markets this year, the bulk of which has been used to refinance maturing long term debt. As a result, our consolidated Debt to EBITDA in the third quarter remained at 4.6x, well within our longer-term target range.
"Lastly, we remain focused on our key priorities for the year, which include achieving strong operating and financial results, adding to the secured project inventory, maintaining our financial strength and the continued self-funding of new growth. We believe that these actions, along with our enhanced focus on capital allocation, growth and return on capital, will maximize shareholder value and deliver on our attractive investor value proposition.
"In summary, it was another strong quarter for the Company and we're pleased with the performance across each of the business units as well as the progress being made on key priorities," concluded Mr. Monaco.
FINANCIAL RESULTS SUMMARY
GAAP earnings attributable to common shareholders for the third quarter of 2019 increased by $1,039 million or $0.52 per share compared to the same period in 2018. The period-over-period comparability of earnings attributable to common shareholders was impacted by certain unusual and infrequent factors, the most prominent being the absence of a goodwill impairment charge of $1,019 million after-tax recognized in 2018 resulting from the classification of the Canadian natural gas gathering and processing businesses as being held for sale. Partially offsetting the increase in GAAP earnings attributable to common shareholders was the change in non-cash derivative fair value gains and losses between periods.
Adjusted earnings in the third quarter 2019 increased by $191 million. The increase was primarily driven by strong operating results across many of the Company's business units and from new projects placed into service in late 2018, partially offset by the loss of contributions from assets that were sold during 2018. On a per share basis, adjusted earnings increased by $0.01 per share compared to the same period in 2018, reflecting the same operating factors noted above, partially offset by a higher share count which reflected Enbridge's common equity financed acquisitions during the fourth quarter of 2018 of all of the outstanding equity securities of its sponsored vehicles not beneficially owned.
DCF for the third quarter was $2,105 million, an increase of $520 million over the comparable prior period in 2018, driven largely by the operating factors noted above as well as lower distributions to noncontrolling interests following the completion of Enbridge's buy-in of the publicly held interest in its sponsored vehicles, which were completed in the fourth quarter of 2018.
Detailed segmented financial information and analysis can be found below under Adjusted EBITDA by Segments.
PROJECT EXECUTION UPDATE
Enbridge continues to make good progress advancing its $19 billion of secured growth capital program, which includes approximately $2.5 billion of projects secured year to date, which will drive highly transparent growth over the near to medium term horizon. 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 continues to anticipate that several growth projects will be placed into service in 2019, including the US$0.7 billion investment in the Gray Oak pipeline and the $1.1 billion HoHe See offshore wind power project in Germany and the Canadian portion of the Line 3 replacement project at interim tolls (discussed further below).
The Gray Oak pipeline is on track for completion by the end of the year, with volumes expected to ramp up in the first quarter of 2020, providing incremental crude pipeline capacity out of the Permian basin, and is underpinned by take-or-pay contracts.
The 497MW HoHe See Offshore Wind project, located in the German North Sea, commenced operations in October with turbines connected and feeding electricity into the grid. The adjacent 112MW expansion, Albatros, continues to advance as planned with all wind turbines installed and is expected to be fully operational by the end of the year. Power generated by the project will receive long-term fixed pricing for 20 years, providing strong returns underpinned by a low-risk commercial model.
Line 3 Replacement
The $9 billion Line 3 Replacement Project is a significant component of the Company's secured project inventory. It is a critical integrity replacement project that will enhance the safety and reliability of Enbridge's Liquids Mainline System.
The Company reached a commercial agreement with its shippers on an interim surcharge until the US portion of the line is completed and it plans to move ahead to place the Canadian segment of the Line 3 Replacement in service on December 1, 2019. This agreement reaffirms the Company's commitment to construct and operate a safe new state of the art pipeline. The capital cost for the Line 3 Replacement Project came in slightly below budget in Canada.
On September 17, the Minnesota Supreme Court denied all remaining appeals of the EIS, thus returning jurisdiction to the MPUC to address the one narrow deficiency in the EIS that was previously identified. The MPUC had indicated that the agency will seek public comment and work expeditiously to address the EIS deficiency. Consistent with this statement, at a hearing on October 1, the MPUC directed the Department of Commerce to complete the additional spill modelling work and submit a revised EIS by December 9. At this time, Enbridge cannot determine when all necessary permits will be issued pending receipt of further information from the MPUC on a timeline to finalize the EIS and reaffirm the Certificate of Need and Route Permit. The State environmental permitting agencies have continued to advance their work, to the extent possible, in parallel with the ongoing EIS process. The Company expects to hear from the MPUC regarding further updated process and timelines after which the agencies are expected to reset their schedules to align with the MPUC process.
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, at this time, the Company does not anticipate any capital cost impacts that would be material to Enbridge's financial position and outlook.
OTHER BUSINESS UPDATES
On September 27, in light of select producer complaints, the Canada Energy Regulator (CER) decided that Enbridge may not offer firm service to prospective shippers on the Liquids Mainline System until such firm service has been approved by the CER. While this decision was a significant departure from past regulatory precedents, the CER noted that its decision to hold a regulatory review prior to the open season does not prejudice Enbridge's ability to offer long term priority access contracts on the Mainline system.
Enbridge's Mainline contract offering is the result of 18 months of extensive negotiations with its diverse customer base and was formulated in direct response to its core customer base who want toll certainty and priority access. These shippers, which represent the majority of Mainline throughput, continue to support the offering.
As a result, Enbridge plans to file an application to the CER seeking approval of a firm service offering as soon as practical.
WCSB Egress Initiatives
By the end of this year, the Company expects to deliver approximately 100 kbpd of incremental Mainline capacity. This additional capacity will be achieved within the Company's current system capacity and operating parameters through crude delivery and receipt window efficiencies further enhanced by the operational flexibility of bringing the Canadian segment of Line 3 Replacement into service, optimization of crude quality slates, as well as the recovery of existing capacity. Together, these capital efficient initiatives will provide much needed and cost effective near-term egress for Western Canadian Sedimentary Basin (WCSB) production.
The Company successfully completed an open season resulting in a 50 kbpd expansion of the Express pipeline. This expansion will provide additional takeaway capacity out of the WCSB to serve the PADD IV market and is expected to ramp up in the first half of 2020.
Market Access Initiatives
Seaway Pipeline announced its intention to launch an open season for up to 200 kbpd of incremental light crude capacity on Seaway's existing system originating in Cushing, Oklahoma and extending to the Texas Gulf Coast area. This highly cost effective expansion would de-bottleneck and optimize the system principally through pump upgrades. Initial expansion capacity could be available by mid-2020, with the expansion expected to be fully in-service in 2022.
In the Bakken, the binding open season on the Dakota Access Pipeline that was launched this summer has recently been extended and modified to include HFOTCO as a destination for shippers. This open season will solicit additional shipper commitments for transportation service that would further support a capacity optimization of up to 1.1 million barrels per day.
Gas Transmission Rate Cases
One of the Company's strategic priorities is to ensure timely and fair returns on existing and new capital additions to the Company's U.S. natural gas transmission systems. Following extensive negotiations on the Texas Eastern rate case, Enbridge reached an agreement with shippers and filed the Stipulation and Agreement on October 28 with the Federal Energy Regulatory Commission (FERC) and expects an approval in the second quarter of next year. The Company has also commenced rate discussions with Algonquin customers with the expectation of a pre-packaged settlement on that system.
During the quarter, the Company received a Decision and Order from the Ontario Energy Board (OEB) on its application for 2019 rates. The 2019 rate application was filed in December 2018 in accordance with the parameters of the Company's OEB approved incentive based regulatory framework and represents the first year of a five-year term. The Decision and Order approved an effective date for base rates of April 1, 2019, and the inclusion of incremental capital module amounts to allow for the recovery of incremental capital investments.
ASSET SALES & FINANCING UPDATE
In 2018, Enbridge reached agreements to sell over $7.8 billion of non-core assets. Enbridge has now received total proceeds of $6.1 billion, including $0.4 billion from the closing of the sale of Enbridge Gas New Brunswick on October 1, 2019 and St. Lawrence Gas Company on November 1, 2019. Enbridge anticipates the remaining proceeds related to the close of the CER regulated Canadian gas gathering and processing assets in the fourth quarter of 2019. These sales provide the Company with further financial flexibility to self-fund its secured growth program, including $2.5 billion of newly secured projects in 2019. As of September 30, the Company's consolidated Debt-to-EBITDA ratio was 4.6x on a trailing twelve month basis. This is well within the Company's long term target credit metric range of 4.5x to below 5.0x Debt-to-EBITDA.
The Company continued to execute on its capital funding plan in the third quarter with total year to date term debt issuances exceeding $4 billion. The bulk of these issuances have been to re-finance maturing debt at significantly lower coupon rates. Notably, in August, Enbridge Gas Inc. completed its inaugural term debt offerings in the Canadian debt capital markets for a total of $700 million. Also in August, Algonquin Gas Transmission, LLC issued US$500 million of 10 year notes through a private placement transaction. In early October, Enbridge Inc. completed a $1 billion single tranche offering of 10 year notes in the Canadian debt capital markets.
EXECUTIVE LEADERSHIP CHANGES
Enbridge announced the following executive leadership changes, effective February 28, 2020. Guy Jarvis, Executive Vice President, Liquids Pipelines, has decided to retire at the end of February 2020, after close to 20 years with Enbridge.
Guy has been in the energy business for over 33 years. His career with Enbridge began as VP, Gas Services and over the years he has held numerous leadership roles in Liquids Pipelines, Investor Relations & Enterprise Risk, and as President, Enbridge Gas Distribution and President, Liquids Pipelines & Major Projects.
"Several of Guy's accomplishments stand out", said President & CEO Al Monaco. "His extensive efforts to optimize throughput on the Mainline system resulting in record volumes while also driving record pipeline safety performance; execution of our regional oil sands strategy; delivering the Line 3 Replacement Project in Canada and navigating the US portion through a challenging process; and leading the execution of our US Gulf Coast strategy."
In alignment with our long-standing commitment to succession planning, Vern Yu, President and Chief Operating Officer Liquids Pipelines, who has been developed as successor for this role, will assume responsibilities as the Executive Vice President & President Liquids Pipelines.
In June 2019, Vern was appointed President & Chief Operating Officer, Liquids Pipelines accountable for Operations, Engineering and Asset Management, and Pipeline Control for Liquids Pipelines. Prior to this, Vern was Executive Vice President & Chief Development Officer. During his 25+ years with Enbridge, Vern has held leadership roles in Finance and Corporate Development as well as leading the business and market development activities for Liquids Pipelines. Vern is a professional engineer and has a Master of Business Administration and Bachelor of Applied Science (Engineering).
"Among his achievements Vern led Liquids Pipelines through the largest slate of organic growth projects in Enbridge history. As Chief Development Officer, he led the $37B acquisition of Spectra Energy and in 2018 executed our priority of selling non-core assets and simplifying the corporate structure," said President & CEO Al Monaco.
THIRD QUARTER 2019 FINANCIAL RESULTS
Third quarter 2019 distributable cash flow increased by $520 million compared to the same period in 2018. The key drivers of quarter-over-quarter growth are summarized below:
- An increase in adjusted EBITDA primarily due to strong base operating performance including higher throughput, and incremental contributions from new projects placed into service. For further detail on business performance refer to Adjusted EBITDA by Segments below.
- Lower distributions to noncontrolling and redeemable noncontrolling interests following the completion of Enbridge's buy-in of the publicly held interest in its sponsored vehicles, which were completed in the fourth quarter of 2018.
- Higher equity distributions in excess of equity earnings from equity investments due to strong performance as well as new equity investments placed into service.
Partially offsetting the DCF growth drivers noted above:
- Higher current income taxes in part as a result of higher earnings before income taxes.
Adjusted earnings increased by $191 million for the third quarter of 2019 compared to the same period in 2018. 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 placing new assets into service, net of depreciation expense no longer recorded for assets which were classified as assets held for sale or sold during second half of 2018.
- Higher income tax expense, in part due to higher earnings before tax and a higher effective income tax rate. The period-over-period increase in the effective income tax rate is partly due to the buy-in of the US Master Limited Partnerships (MLP), Enbridge Energy Partners, L.P. and Spectra Energy Partners, LP, which results in the Company being taxed on 100% of the MLP earnings rather than the Company's proportionate share of their earnings.
Adjusted earnings per share for the third quarter of 2019 increased by $0.01 compared with the third quarter of 2018. The increase in adjusted earnings noted above was partially offset on a per share basis by the issuance of approximately 297 million common shares to acquire, in separate transactions, all of the outstanding equity securities of the Company's sponsored vehicles not beneficially owned by Enbridge during the fourth quarter of 2018.
ADJUSTED EBITDA BY SEGMENTS
Adjusted EBITDA by segment is reported on a Canadian dollar basis. Adjusted EBITDA generated from U.S. dollar denominated businesses were translated at weaker average Canadian dollar exchange rates in the third quarter of 2019 (C$1.32/$US) when compared to the corresponding 2018 period (C$1.31/$US). A portion of the U.S. dollar earnings are hedged under the Company's enterprise-wide financial risk management program. The offsetting hedge settlements are reported within Eliminations and Other.
Liquids Pipelines adjusted EBITDA increased by $193 million for the third quarter of 2019 when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- Mainline System adjusted EBITDA reflected higher throughput, driven by strong supply and continued optimizations of the system, as well as a higher period-over-period IJT. Partially offsetting the increase to EBITDA was a lower foreign exchange rate on contracts used to hedge U.S. dollar denominated revenues from the Canadian portion of the Mainline System.
- Gulf Coast and Mid-Continent System growth was driven by strong demand in the US Gulf Coast for Canadian crude which drove higher volumes on the Flanagan South and Seaway pipelines.
- Other increased primarily as a result of strong throughput on the Bakken Pipeline System.
GAS TRANSMISSION AND MIDSTREAM
Gas Transmission and Midstream adjusted EBITDA decreased by $94 million for the third quarter of 2019 when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- US Gas Transmission adjusted EBITDA reflected higher contributions from new pipelines places into service in late 2018, including Valley Crossing. The increase in EBITDA was partially offset by higher planned integrity expenditures and lower revenues and higher operating costs associated with the Texas Eastern pipeline system incident in Lincoln County, Kentucky.
- Canadian Gas Transmission adjusted EBITDA period-over-period results primarily reflect the absence of contributions from the provincially regulated Canadian natural gas gathering and processing business which was sold on October 1, 2018 as well as higher operating costs. The sale of the remaining CER regulated assets is expected to close in the fourth quarter of 2019.
- US Midstream adjusted EBITDA primarily reflects the absence of EBITDA from Midcoast Operating, L.P. which was sold on August 1, 2018, as well as lower commodity prices impacting fractionation margins at Aux Sable.
- Other adjusted EBITDA growth is driven by contributions from the Big Foot Oil and Gas offshore pipelines which was placed into service during 2018.
Enbridge Gas Distribution and Union Gas were amalgamated on January 1, 2019. The amalgamated company has been renamed Enbridge Gas Inc. (EGI). Post amalgamation the financial results of EGI reflect the combined performance of the two legacy utility operations.
Gas Distribution adjusted EBITDA will typically follow a seasonal profile. It is generally highest in the first and fourth quarters of the year reflecting greater volumetric usage during the heating season, and lowest in the third quarter as there is generally less volumetric usage 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 in a given quarter.
Gas Distribution adjusted EBITDA decreased by $4 million for the third quarter 2019 when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- EGI adjusted EBITDA increased due to higher distribution charges primarily resulting from increases in distribution rates and customer base, as well as synergy captures realized from the amalgamation of Enbridge Gas Distribution and Union Gas.
- These increases were more than offset by accelerated capital cost allowance deductions reflected as a pass through to customers.
On October 1, 2019, the Company completed the sale of Enbridge Gas New Brunswick.
RENEWABLE POWER GENERATION AND TRANSMISSION
Renewable Power Generation and Transmission adjusted EBITDA increased by $9 million for the third quarter of 2019 when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- Stronger wind resources across the majority of the Company's North American wind facilities, partially offset by higher mechanical repair costs at certain United States wind facilities.
- Higher contributions from the Rampion Offshore Wind Project.
Energy Services adjusted EBITDA increased by $17 million for the third quarter of 2019 when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- Higher EBITDA contributions from Energy Services crude operations as a result of the widening of certain location and quality differentials during the second half of 2018 and the first quarter of 2019, which increased opportunities to generate profitable transportation margins that were realized during 2019.
ELIMINATIONS AND OTHER
Operating and administrative costs captured in this segment reflect the cost of centrally delivered services (including depreciation of corporate assets) inclusive of amounts recovered from business units for the provision of those services. Also, as previously noted, U.S. dollar denominated earnings within the segment results are translated at average foreign exchange rates during the quarter. The offsetting impact of settlements made under the Company's enterprise foreign exchange hedging program is captured in this segment.
Eliminations and Other adjusted loss before interest, income taxes and depreciation and amortization decreased by $29 million for the third quarter of 2019, when compared to the same period in 2018. The key quarter-over-quarter performance drivers are summarized below:
- Lower operating and administrative costs in 2019.
- Lower realized foreign exchange hedge settlement losses primarily due to a favourable spread between the average exchange rate of $1.32 for the third quarter of 2019 (Q3 2018: $1.31) and the third quarter 2019 hedge rate of $1.24 (Q3 2018: $1.16), partially offset by a higher notional amount of foreign currency derivatives.
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