Enbridge Inc. (NYSE:ENB) Q1 2024 Earnings Call Transcript

Enbridge Inc. (NYSE:ENB) Q1 2024 Earnings Call Transcript May 10, 2024

Enbridge Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.59. ENB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Rebecca Morley: Good morning, and welcome to the Enbridge Inc., First Quarter 2024 Conference Call. My name is Rebecca Morley and I’m the Vice President of the Investor Relations team. Joining me this morning are Greg Ebel, President and CEO; Pat Murray, Executive Vice President and Chief Financial Officer and the heads of each of our business units, Colin Gruending, Liquids Pipelines; Cynthia Hansen, Gas Transmission and Midstream; Michele Harradence, Gas Distribution and Storage; and Matthew Akman, Renewable Power. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session for the investment community. [Operator Instructions] Please note that this conference is being recorded.

As per usual, this call is being webcast and I encourage those listening on the phone to follow along with the supporting slides. We’ll try to keep the call to roughly one hour. And in order to answer as many questions as possible, we will be limiting the questions to one plus a single follow-up, if necessary. We will be prioritizing questions from the investment community. So if you are a member of the media, please direct your inquiries to our communications team, who will be happy to respond. As always, our Investor Relations team will be available following the call for any follow-up questions. On to Slide 2, where I will remind you that we’ll be referring to forward-looking information on today’s presentation and Q&A. By its nature, this information contains forecast assumptions and expectations about future outcomes which are subject to the risks and uncertainties outlined here and discussed more fully in our public disclosure filings.

We will also be referring to non-GAAP measures summarized below. And with that, I will turn it over to Greg Ebel.

Greg Ebel: Well, thanks very much, Rebecca and good morning, everyone. Thanks for joining us with this call. I’m pleased to be here today to record financial results for the quarter, driven by strong operational performance and strong energy fundamentals. I’ll provide a quick recap for Q1 and update you on each of our businesses, and Pat will speak further to our financial performance, capital allocation priorities, and future growth outlook. And as always, the management team is here to answer any questions that the investment community has following our presentation. I’m pleased to report adjusted EBITDA is up 11% year-over-year and we’re well on our way to meeting our financial guidance for 2024. We saw high utilization rates across our systems and safety, which remains a top priority, was also excellent during the quarter.

As you know, the acquisition of East Ohio Gas closed on March 6th, which further diversifies our business, extends our growth outlook and enhances the stable cash flow profile of our asset base. As a reminder, we’ve already secured over 85% of the required financing for the U.S. gas utility acquisitions and will fund the remainder using a combination of alternatives which may include hybrid or bond issuances, capital recycling, and ATM issuances. We have the capacity to utilize any and all of these sources of funding and so that we can be in a position to optimize market conditions, you’ll see us updating and preparing security filings to preserve this funding flexibility and ensure we complete all the utility acquisition funding well in advance of year-end.

We closed the Alliance/Aux Sable divestiture in April, continuing our track record of recycling capital at attractive multiples. The mainline tolling agreement was recently approved as filed by the Canadian Energy Regulator. The mainline continues to operate at or near capacity and we are ready to add additional egress as our customers need it. We had exciting growth announcements in the U.S. Gulf Coast with our recent Whistler JV, the sanctioning of Sparta pipeline, and the acquisition of two marine docks and adjacent land at our Ingleside export facility. We’ve also recently progressed to full FID on the Tennessee Ridgeline Expansion project following the TVA’s decision to construct a new natural gas combined cycle plant in Kingston, Tennessee.

This project further underlines the criticality of pipelines in fueling lower carbon power via gas generation. Today, we published our 23rd annual sustainability report, which highlights our performance and approach to environmental, social, and governance goals. Now before I touch on these developments further, let me take a moment to highlight what really was the first rate financial performance in the quarter. Pat will be getting into this in more detail later, but we’re going to be presenting side-by-side results, those being adjusted actuals and the base business we guided against. We believe this transparency will let you see our base business against our ’24 guidance as well as the all-in results which include a partial month of owning East Ohio Gas and all our utility financings to date.

Starting with all-in, our EBITDA is up 11% and DCF per share up 4% from last year, primarily due to strong asset performance across liquids, gas transmission, and renewables as well as a partial month contribution from EOG. Our balance sheet remains well-positioned ahead of the closings of Questar and PSNC at 4.7x debt to EBITDA. Since this number is as of March 31st, these leverage numbers don’t yet include the beneficial proceeds from the sale of Alliance and Aux Sable. Touching briefly on the base business, we are very much on track with our financial guidance. In fact, our base business EBITDA and DCF per share are up both 8%, and debt to EBITDA is at 4.6x. Under both views, we’ve had a record financial quarter, and we look forward to keeping that momentum going.

Our industry leading business risk supports our long held leverage target of 4.5x to 5x. Enbridge has virtually no commodity price exposure and over 98% of our earnings are generated from either cost of service or take or pay contracted assets and 80% of our EBITDA is earned from assets with protection against inflation. And we are well hedged against interest rate volatility with less than 5% of our debt portfolio exposed to floating rates. Now let’s take a look at the notable highlights I mentioned earlier from each of our businesses starting with liquids. Liquids pipelines delivered high utilization levels once again. The mainline transported over 3.1 million barrels per day during the first quarter and we continue to expect average throughput of 3 million barrels per day for the year.

As I mentioned earlier, the Canadian Energy Regulator approved the mainline tolling settlement which we view as a win-win-win for Enbridge, our customers, and the industry. Switching gears to the U.S. Gulf Coast, we acquired two strategic docks and nearby land adjacent to Ingleside for $200 million. This acquisition will optimize existing operations in the area by increasing VLCC docking windows at Ingleside and will help set the stage for Ingleside to realize its ultimate potential as the industry leading multi products export terminal in North America. In the Permian, we’ve launched our open season to expand Gray Oak capacity by up to 120,000 barrels per day, pending a successful open season. Recently, we finished constructing four new storage tanks at Ingleside, bringing total storage capacity to 18 million barrels there.

And we’ve already sanctioned an additional five tanks to add another 2.5 million barrels of storage capacity by 2025. Now let’s take a deeper look at gas transmission. In Canada, wood fiber is progressing well, and we expect to reach the 60% engineering milestone in the second half of 2024. In the United States, we announced the formation of the Enbridge WhiteWater MPLX joint venture. This transaction will be immediately accretive to DCF per share and our balance sheet metrics and allows us to establish a natural gas footprint in the Permian Basin. The Tennessee Ridgeline Expansion project has progressed to full FID. This is the natural gas pipeline we announced a few years back that will deliver gas to the Tennessee Valley Authority’s new natural gas combined cycle plant, an emissions friendly replacement of their existing coal fired power plant.

Construction will begin in 2025 with an expected in service date of Q4 2026. We also sanctioned the construction of offshore pipelines to service Shell and Equinor’s U.S. Gulf Coast operations. Now before I discuss our strategic joint venture in more detail, let me take a moment to comment on the topic du jour [ph]. In addition to the growing demand for natural gas to feed LNG terminals, the build out of data centers and generative AI is forecasted to require a material increase in power generation. This new power generation will be fed by a combination of natural gas and renewables and supports our view that the world needs all forms of energy. As the sector evolves, Enbridge is well positioned to serve this increased demand through the vast footprint of our assets connected to key supply basins.

And with Enbridge’s asset base, we can offer customers access to permanent power by fueling natural gas generation and renewable power. It’s a competitive advantage that we have to offer at jurisdictions throughout North America. We expect this trend of serving data centers will take some time to ramp up but are ready to serve our customers and their energy needs through our integrated infrastructure network. Now let’s take a deeper dive into our WhiteWater joint venture. On March 26th, we announced the formation of the Whistler pipeline JV, which will own a gas pipeline and storage network connecting the Permian Basin to the growing U.S. Gulf Coast demand. This transaction further extends our access to the U.S. Gulf Coast LNG terminals, adding a connection to Cheniere’s Corpus Christi terminal.

There are four assets within the JV, the Whistler Pipeline and the Waha Natural Gas Storage, which are currently in operation. The ADCC pipeline, which is expected to come into service in Q3, and the Rio Bravo pipeline, which will enter service in 2026. The portfolio of assets is highly contracted and backed by predominantly investment grade counterparties, which aligns perfectly with our low risk commercial model. Beyond that, the system has embedded future growth opportunities which will support growing LNG export volumes. This new JV is a strategic move into a prime gas supply basin bringing together three key Texas Midstream partners in an extremely attractive and financially beneficial manner. So now let’s take a closer look at gas distribution and storage.

As I mentioned earlier, we closed the Enbridge Gas Ohio acquisition on March 6th, and we are making great progress on the remaining U.S. Gas Utilities acquisitions. The integration teams are working hard, and we look forward to continuing to deliver safe, reliable, and affordable natural gas to millions of residents and businesses. The Ohio Gas Utility serves 1.2 million customers and includes rate structures that decouple revenue from volumes, reducing earning seasonality. In addition, over 80% of the capital is subject to recovery riders, which allows Enbridge Gas Ohio to recover on that capital in a matter of months rather than years. We continue to work collaboratively with Questar and PSNC’s regulatory bodies and expect to close those acquisitions later this year.

Turning to our Canadian Gas utility, we filed a court appeal and submitted a motion with the OEB to review their December rate rebasing decision for EGI. The court appeal has been placed in abeyance until the OEB review is complete, which we expect could be during the third or fourth quarter of this year. The province of Ontario is enacting the keep energy cost down act, and we’re encouraged that the government of Ontario is taking positive steps to preserve customer choice and affordability. In the meantime, we’ll continue to focus on delivering safe and reliable energy to our growing customer base in Ontario and the second phase of the rebasing proceedings. On the operation side, our Dawn hub continues to serve nearby markets with about 290 BCF of networking storage capacity, roughly a third of which is non-regulated, and available to benefit from improved storage rates.

Let’s jump into the renewable section. As mentioned at investor day, we like offshore wind in France because of the solid risk adjusted returns, strong partnerships, and long-term government backed offtake agreements. This focal point is exhibited through the three French projects we have coming into service shortly with Fox Squirrel, PGL, and Calvados. At Fecamp, all 71 turbines have been installed and the wind farm has begun generating electricity, powering the equivalent of more than 400,000 homes. At Provence Grand Large, all turbines and the floaters have been installed. Now let’s pivot to our ESG progress outlined in our 2023 sustainability report. Today, we published that 23rd annual sustainability report, and I’m pleased to report great progress towards our environmental, social, and governance goals.

Since 2018, we’ve reduced our GHG emissions intensity by 37%, and we’re well on our way to net-zero emissions by 2050, having reduced our absolute emissions by 20% and our methane emissions by 40% since 2018. On diversity, we’ve already met and exceeded our board targets and have increased our workforce representation in all measurable areas since this time last year. Safety remains our highest priority, of course, and we continue to drive industry leading standards and achieved a 10% improvement over our previous three-year average total recordable incident rate. Sustainability is core to Enbridge, and we’re committed to meeting the needs of our customers, investors, and society as we continue to provide energy in a planet friendly way everywhere people need it.

So now let me turn things over to Pat to walk you through our quarterly financial results, our capital allocation priorities and our growth outlook.

Pat Murray : Thanks, Greg, and good morning, everyone. We’re off to a great start in 2024. It’s been another strong quarter operationally and I’m proud of the teams for successfully closing the acquisition of the Enbridge Gas, Ohio on March 6th. Utilization was high across all franchises, showcasing continued demand for assets. I’m going to speak primarily about the actual results today. We’ve also broken out what we refer to as our base business results, which exclude the contribution from and the related financings of the U.S. gas utilities, and we’ll continue to report our base business results for comparison against financial guidance. In the supplementary materials posted on our website, we provided a reconciliation between the two for transparency purposes.

Now on to the results of the business. Year-over-year, first quarter adjusted EBITDA is up 11% and DCF per share up 4%. Inclusive of share issued last September to fund the U.S. gas utilities. In Liquids, continued demand for our full pass system drove strong results, particularly on the mainline and our Mid-Continent and Gulf Coast assets, specifically the Flanagan South Pipeline and the Ingleside export facility. Gas Transmission had another quarter of high utilization and favorable recontracting on storage and transmission assets, as well as benefiting from the acquisition of our gas storage facilities at Tres Palacios and Aitken Creek and the new Tomorrow RNG portfolio. Despite significantly warmer weather in Ontario, which impacts first quarter results by almost $80 million, EGI’s results were consistent year-over-year as the Canadian utility benefited from higher rates and increased customer base.

Enbridge Gas, Ohio, as I noted, closed at the beginning of March and contributed about $50 million of EBITDA in the 24 days of ownership. The renewables business benefited from increased Hohe See and Albatross ownership, compounded by strong international wind resources on those same assets, as well as contributions from our investments in Fox Squirrel as a result of the generation of investment tax credits. As a reminder, our Energy Services segment is now embedded into the business units, so you will not see it as a standalone segment anymore. This change has no impact on our segmented 2024 financial guidance. Eliminations and Other is up in 2024 owing to the higher investment income and lower operating administrative costs within the quarter.

Below the line in DCF per share, higher EBITDA was partially offset by higher interest rates impacting both floating rate and new debt. And finally, the additional share count from the equity issuance in September of last year also impacted our per share measures. Today, we’re also reaffirming base business financial guidance, and we expect to be well within the range. If we are able to close the Utah acquisition within the second quarter, as we expect, we’ll look to update the full year guidance inclusive of the Utah acquisitions on our Q2 call. Before I move on, I want to remind the investment community that our results have implicit seasonality. The first and fourth quarters are typically our strongest financial quarters. Gas consumption at the Ontario utility and gas transmission on our gas pipelines increases during colder months, while refinery turnarounds typically take place in the spring summer, which means our liquid deliveries are lower during these periods.

With that, let’s turn to our growth drivers. This slide drives a bit deeper into our secured capital program and optimization opportunities, providing visibility to 4% to 5% of our overall medium-term growth outlook. As mentioned, our secured growth program now sits at $25 billion. The backlog is heavily weighted towards our gas transmission utility business and the diversity of projects both in terms of scope and geography reduces our exposure to inflation or regulatory risk. Also worth pointing out is that our share of capital in Rio Bravo has been reduced in line with our lower interest in the pipeline as outlined in our joint venture press release in March. On cost savings, we continue to evaluate opportunities to reduce overhead, improve productivity and incorporate inflation protection into our commercial agreements on an ongoing basis.

Asset optimization, cost management and contract negotiations have historically generated 1% to 2% of annual growth for Enbridge and will remain important drivers of our business going forward. Lastly, I’ll touch on our capital allocation priorities that we spoke about at Enbridge Day. With the remaining LDC closes in sight, I’d like to reiterate our continued commitment to balance sheet strength and sustainable capital returns. Our leverage guardrails of 4.5x to 5x debt to EBITDA remain in place and are supported by our industry leading low risk business model. The sale of our interest in Alliance/Aux Sable reinforces the balance sheet and ensures continued financial flexibility ahead of the Questar and PSNC closings this year. As I read last quarter and emphasized to Enbridge Day, our focus remains grounded in capital prudency.

Our value proposition has always been underpinned by a ratable growing dividend. We’ve distributed $34 billion to our shareholders over the past five years alone. And looking ahead, we expect that figure to grow to roughly $40 million over the next five years, while maintaining our 60% to 70% DCF payout range. We’re able to achieve that thanks to the visibility and duration of our multiyear growth outlook. We plan to spend $6 billion to $7 billion per year on our secured growth program and while we have additional capacity, we don’t need to spend it to achieve our growth targets. With that, I’ll pass it back to Greg to wrap things up.

Greg Ebel : Well, thanks very much, Pat. That’s a really nice summary of a very successful first quarter to start the year and of the great progress we’ve made across all of our businesses. The decisions we’re making today are setting the stage for Enbridge to continue growing our dividend and sustainably returning capital to our shareholders for years to come. Over the last 20 years, we’ve generated an industry leading average TSR CAGR of 12% through a balance of capital appreciation and dividend growth. Our value drivers are unchanged, unrivaled and quite unique in the midstream sector. We have diversified utility like cash flows and a strong balance sheet that has supported 29 years of dividend increases, and we maintain an attractive risk adjusted growth outlook.

We benefit from lower carbon optionality throughout our conventional business, which will support affordable and responsibly paced global energy transition. Our strong value fundamentals are expected to continue delivering attractive shareholder returns making Enbridge your first choice investment opportunity. Thank you all. And now let’s open the line for questions.

See also Morgan Stanley’s Top 15 Stock Picks for 2024 and 14 Best Financial Sector Dividend Stocks To Invest In.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Robert Catellier from CIBC.

Robert Catellier: I wondered if you could give us your updated view on financial markets and asset sale markets and how you’re weighing capital recycling versus other options for funding utility acquisitions notably the ATM.

Greg Ebel: Yes, Robert, maybe I’ll start and maybe Pat will add here. Look, I think you seen lot of asset sales, people have adjusted to higher interest rates and you can see what I would argue a more robust market today for asset sales. And as you know, we’ve done well in excess of $10 billion in asset sales since 2018. So that’s always on the table. I think what we want to make sure and I think what we’re doing is making sure that we’ve got maximum flexibility, maximum optionality and preparedness to complete the last 10% or so of the financing. So, no decisions have been made, but obviously everything on the table and we think that probably gives us the best opportunity given the markets, given we’re not exactly sure when the transactions are going to close.

So all that being said, highly confident we’ll get that all closed. In fact, I guess, if you had regulatory approval today, you could actually just close them all right now too. So, I think we’re set up with everything still on the table, maximum flexibility and that’s going to create the best opportunity to maximize value.

Robert Catellier: My next question, just wondering if you could update us on how the U.S. Gulf Coast crude oil export market is evolving. Specifically, in the short- to medium-term here, we have a number of impacts, refinery maintenance in Europe, less Mexican exports and the indirect impacts from the startup of TMX.

Colin Gruending: Sure Robert, Collin here. So yes, you sound like you’re on top that. It’s still pretty robust. Certainly the light export market is on, you can see that Permian supply is up and we’re seeing strong throughputs off the dock. And likewise on the heavy export market or even just maybe even further upstream a little bit, just heavy into the U.S. Gulf market itself is still robust. Like you said, we’re seeing Mexican oil staying home and it’s just creating more room for the Canadian heavy barrel, which were a strategy we’ve worked on for a long time and we’re going to bring on EHA here soon to help our plumbing in that area. So we’re watching that closely. It sounds like you are too. It remains pretty robust.

Operator: Your next question comes from the line of Rob Hope from Scotiabank.

Rob Hope: Wanted to follow-up on the commentary in the prepared remarks on increasing gas demand related to data centers. How large of an opportunity would this be for your gas pipeline systems? And specifically, kind of when do you think you could start to see some expansions being required?

Greg Ebel: Sure. Well, you know what, I’ll turn it over to Cynthia. I guess lots of numbers out there for sure, Robert, and, lots of predictions. I think it’s early to be quite honest, but in any event, it’s going to be positive from a power and gas demand perspective. So whether it’s, on the power side, half to 1.5% increase through 2030 or, I’ve seen numbers from 5 Bcf up to 16 Bcf. I think we’re well situated. It’s not just the pipelines, but I’ll turn it over to Cynthia, maybe, last Michele and Matthew to make comment too.

Cynthia Hansen: Yes, thanks. Rob, we are excited by this opportunity obviously to help build out the supporting infrastructure for the natural gas generation to support AI data centers. Our GTM assets are really well located. We’re within 50 miles of 45% of all the natural gas power generation in North America. So we are going to be in a position to build that out. As you look to timeline, just like Greg said, there’ll be some opportunities in the near-term just depending on what your capacity and availability is and location. And so we look forward to that and in the longer term, it seems to be really positive. Michelle?

Michele Harradence: Sure. Rob, what we’re finding as we’re speaking to customers about data centers is they’re typically looking for reliable and affordable electricity in locally supportive jurisdictions. So the jurisdictions we currently are certainly the ones we will operate in, whether that’s Utah, North Carolina or Ohio. They offer that really very much hand in hand with gas fired generation. So to the degree that there is data growth in those regions, we certainly expect there will be data growth, that center growth in those regions will certainly play a role.

Matthew Akman: Yes. Hi, it’s Matthew. Just quickly on renewables, demand for renewables is already very strong and I think the data center stuff just enhances that. Large tech companies are really our kind of customers, and I think we’re their kind of developer. We’ve got a reliable offering. We can deliver. We’ve got interconnection agreements ready to go and the capabilities. So just adds another tailwind for our renewable business.

Greg Ebel: Yes, good setup. And we did mention storage, but given people want to jump on stuff, so obviously as you know we’ve got 600 Bs or so of storage across the continent that’s going to be powerful too.

Rob Hope: And then maybe just switching over the heavy and the crude oil system. Interesting, we’re talking about expansions as Trans Mountain is ramping up. But even still, it does seem like there’s an increasing pull of heavy to the Gulf Coast. So how have discussions with shippers formed regarding kind of the next phase of expansions of heavy capacity out of Alberta? And what do you think the pacing or timing will be of your phase expansions on the mainline?

Colin Gruending: Sure. Hey, Robert, it’s Colin. Yes, so indeed now that we’ve got the multiyear tolling deal done, it’s kind of cleared the way and the table for discussions with shippers on the next series of things to do in the job jar, expanding the system or even just continuing to optimize the system, which we’ve been doing over and over again, are on the table right now. We’re in discussions with shippers currently and we’ve got some offerings in front of them that are relatively capital efficient, executable permitting wise. With a view to keeping some open egress here through the whole piece, so that prices are higher. So that’s the objective. Timing wise, you’re going to see optimizations continue from us serially here month to month, quarter to quarter and then chunkier expansions in the 100,000 a day category in the next two years, which would pair up pretty well with I think the forecast we’ve been conveying around the system refilling within that period of time.

So that’s the current discussion and plan which is consistent book we’ve had for the last year or two.

Operator: Your next question comes from the line of Benjamin Pham from BMO.

Benjamin Pham : On the recent Capital Power that shelved their CCS project, how does that impact you or in any way for your Wabamun Hub project?