Enbridge Inc. (NYSE:ENB) Q3 2023 Earnings Call Transcript

Enbridge Inc. (NYSE:ENB) Q3 2023 Earnings Call Transcript November 3, 2023

Enbridge Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.45.

Rebecca Morley: Good morning and welcome to the Enbridge Inc. Third Quarter 2023 Financial Results Conference Call. My name is Rebecca Morley and I’m the Vice President of Investor Relations. 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. As per usual, this call is recorded and webcast.

And I encourage those listening on the phone to follow along with the supporting slides. We will try to keep the call to roughly 1 hour. [Operator Instructions] 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 would be happy to assist you. As always, our Investor Relations team will be available following the call for any follow-up questions. On 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: Thanks very much, Rebecca and good morning, everyone. Thanks for joining us. I am pleased to be here today to review another strong quarter. We are also excited to share a number of new announcements that further enhance our long-term value proposition, and of course, provide an update on our businesses. Pat will then walk you through the financial performance, our capital allocation priorities, and our outlook. And lastly, I’ll close with a few takeaways. And as always, the Enbridge team is here to address any questions you may have at the end. Q3 was another solid quarter for Enbridge. Strong operational performance across the business drove strong financial results that were consistent with our expectations. As such, we are pleased to reaffirm our EBITDA and DCF per share guidance.

As part of the pre-funding for the Gas Utilities acquisition, we successfully raised over $8 billion in September. And when combined with the assumed debt, we have over $14 billion of required funding in place, which significantly derisks our financing plan associated with the utility acquisitions, which we expect to close on a staggered schedule through 2024. Adjusted for pre-funding of the acquisitions, our debt to EBITDA for the quarter is right at the bottom of our stated 4.5x to 5x range. On an unadjusted basis, you will note debt-to-EBITDA at 4.1x. System utilization across the business was really strong. In our liquids business, we are relaunching and upsizing an open season on Flanagan South Pipeline, which should further strengthen our mainline path.

And we are also set to initiate an open season for the Gray Oak pipeline in the fourth quarter and will offer full path Permian service by exports through Enbridge Ingleside Energy Center. In Gas Transmission, we initiated an open season on the Algonquin gas pipeline system to provide additional service to New England, where reliable and affordable gas is desperately needed. And our teams continue to demonstrate their ability to execute. We are on track to successfully place approximately $3 billion of secured capital into service by year end and our [indiscernible] large French offshore wind projects remain on budget and are still expected to come into service in Q1 2024. From a regulatory perspective, we expect to file the Mainline tolling agreement with CER before year end.

And our Ontario gas utility rebasing process is well underway and we expect the OEB will issue a decision on ‘24 rates by year end. Together with Dominion, we have filed applications for all key U.S. federal and state required regulatory approvals to complete the pending U.S. gas utility acquisition and all are still expected to close in 2024. Last but not least, on the execution front, we continue to make progress on our emissions, social and diversity and inclusion goals and remain committed to global ESG leadership. As you are aware, in third quarter, we added visibility to our growth outlook through the aforementioned gas utilities acquisitions. The assets have an embedded rate base CAGR of 8% and cost recovery mechanisms that result in improved capital efficiencies.

And in our renewable business, we are excited to announce a European offshore wind acquisition which we will discuss in greater detail in a few minutes. We are continuing to execute on our tuck-in M&A strategy and are excited to welcome the moral RNG operations team to Enbridge. These fully contracted landfill gas to RNG facilities further establish Enbridge in the RNG space. All in all, 2023 has been a great year so far, operationally and financially. As mentioned earlier, we remain on track to achieve our guidance and deliver on our growth commitments. Before we dig into the details of the quarter, I’d like to revisit our investor value proposition that we laid out earlier this year. Our business is stable and we remain committed to delivering predictable cash flows.

The balance sheet is strong and remains a key priority. We have a long track record of sustainably returning capital to shareholders and will continue to grow our dividend. We have visibility to our near-term and medium-term growth outlooks with conventional and lower carbon opportunities embedded throughout the business. All of our project announcements during and subsequent to the quarter are individually and collectively aligned with that value proposition. Each will generate an attractive risk-adjusted return that is regulated or backed by long-term off-take agreements. Looking forward, our 5% EBITDA medium-term growth outlook that we set out at Investor Day significantly derisked and today’s announcements enhance Enbridge’s lower carbon footprint across multiple business units while increasing DCF per share.

Together, these value drivers have underpinned 20 years of dividend growth and average annual shareholder returns of approximately 11% and we expect this to continue. We are confident that our recent acquisitions enhance each component of our value proposition. Let’s take a minute to review the quality of our cash flow profile. Post closings of the Gas Utility acquisition, Enbridge’s EBITDA mix will be approximately 50% natural gas and renewables and 50% liquids. During the quarter, we have seen continued volatility in interest rates and foreign exchange markets, but our longstanding active risk management strategy is designed to allow us to continue to deliver results in all market cycles. 98% of Enbridge’s earnings are currently generated from either cost of service as noted or take-or-pay contracted assets and that will only improve as we close the gas utilities transactions.

We actively manage our forward interest rate exposure through risk mitigation policies, which leave us with just 10% of our debt portfolio exposed to floating rates through the end of 2024. 95% of our customer base is investment grade and 80% of our EBITDA comes from assets with built-in inflation protection against rising costs. This enables our business to deliver consistent, high-quality cash flows, which drive predictability in all economic cycles. And we take tremendous pride in our 17-year track record of achieving our guidance and we look forward to continuing that trend this year. Turning to the acquisition of the three premier U.S. Gas Utilities that we announced during the quarter, this transaction represents a generational opportunity for the company.

Upon closing, Enbridge will be North America’s largest natural gas utility platform, delivering approximately 9.3 Bcf of natural gas per day to approximately 7 million customers. Enbridge was able to secure historically attractive acquisition multiples on the assets, creating long-term value for our shareholders. And as a reminder, we agreed to pay approximately 1.3x the estimated 2024 rate base and approximately 16.5x price to earnings based on 2023 estimates, both of which are significantly below recent precedent and subsequent transactions. Pro forma, these gas utilities further enhance the stability of our already industry leading risk profile by adding incremental regulated earnings. And those earnings will grow alongside $1.7 billion of annual low-risk quick cycle rate base investment.

Each of the utilities is located in gas supportive jurisdictions and has an attractive capital structure allowing us to earn constructive returns with favorable equity thickness. Since the announcement of the deal, we have made significant progress on the financing of these acquisitions. So let’s move on to that now. The all-in purchase price of the transactions is $19 billion, inclusive of $6 billion of assumed debt, which initially left approximately $13 billion left to finance. Immediately following the announcement, we issued $4.6 billion of common shares and issued an additional $3.7 billion of hybrid notes, which received partial equity treatment from rating agencies. In combination with the assumption of debt, we have approximately 75% of the required financing in place significantly derisking the funding plan.

The remaining financing needs are very manageable and can be satisfied through the various tools available to us, including the issuance of senior unsecured notes, asset recycling, the reinstatement of Enbridge’s DRIP program or initiating at the market common share issuances. We’ll make use of that flexibility and the staggered closing time lines to optimize the financing plan and factor in changes to the marrow economic environment. Now let’s jump into the business unit update, starting with liquids. In Liquids Pipelines, our highly competitive system remains heavily utilized with record third quarter volumes on the Mainline and significant apportionment levels in the month of November. In May, we reached a settlement for the mainline tolling framework, and those tolls took effect on July 1.

We expect to finalize that settlement with industry and submit a joint application to the Canadian energy regulator before the end of the year. With the expectation that the new tolling settlement will be approved and implemented in the first quarter of 2024, we relaunched and upsized our previously announced FSP open season in addition to contracting throughput on Flanagan South, the open season volumes also secure long-haul throughput on the Enbridge network from Western Canada to the Gulf Coast. In the Permian region, we saw a new record for export volumes through Ingleside again this quarter. Giving us further verification of and confidence in our Gulf Coast strategy. In order to support further growth in the Permian and meet our customer needs, we expect to initiate an open season on our growth Gray Oak pipeline by the end of this year and will add 2 million barrels of storage at our Ingleside terminal in 2024.

Now let’s take a look at our Gas Transmission Business. Starting in Canada, the engineering work on wood fiber LNG is progressing, and we expect to hit our 60% engineering milestones and to set our preferred return in the second half of 2024. We also closed the previously announced acquisition of Aitken Creek Gas Storage on November 1. This asset is well positioned and will enhance our service offering to our customers and support our LNG export strategy in B.C. And in the U.S. Northeast, we’ve initiated an open season on the Algonquin pipeline, which will provide much needed supply to New England and will help stabilize energy prices in the area. All told, we are continuing to progress on overall $11 billion high-quality investments in the gas transmission business and capitalize on strong North American gas supply and demand fundamentals.

Moving to our gas distribution business in Ontario. We continue to see growth in our distribution business, which is supported by population growth and customer additions. We are on track to exceed our customer additions, forecast of 42,000 for this year. Ontario population is expected to grow by approximately 2.5 million people over the next decade. All of those people will need access to cost-effective reliable energy, an Enbridge will be there to provide it. And as we mentioned on the previous call, the Ontario government has publicly promoted that natural gas will play a critical role in supplying the province’s energy mix. The need for natural gas and customer growth at Enbridge Gas will continue to underpin our estimated $1 billion of annual capital investment in Ontario for the foreseeable future.

On the regulatory front, the Ontario Energy Board approved our partial settlement to support the assessment of our ‘24 rates, and we expect them to do a final decision on the remaining items by the end of the year. We look forward to providing a comprehensive update alongside our year end results. Next, let’s take a closer look at some of the developments in our renewable business. I am pleased to announce that the acquisition of additional ownership in Hohe See and Albatross offshore wind farms, which are located approximately 100 kilometers off the Northern coast of Germany. These are assets we know well and where we have been ahead of strong relationship and partnership with EnBW. The acquisition will almost double our ownership of the assets and is expected to be immediately accretive to DCF.

The step-up in ownership of Hohe See and Albatross will materially grow the size of our renewable power business and continue our track record of investing in assets that generate utility-like cash flows, while working towards our net zero commitments. In France, we are on track to bring a gigawatt of new generation online by 2025. Fécamp will install about half of the turbines and Provence Grand Large, all turbines have been installed and all floaters have been secured. All three projects are in budget. Fécamp and PGL are expected to be in service during the first quarter of 2024 and Calvados continues to make good progress towards its 2025 in-service date. Now let’s take a deeper look at the equally attractive investment in renewable natural gas we announced today.

Enbridge has entered into an agreement with moral renewables to acquire 7 high-quality operating and fully contracted landfill gas to RNG assets located in Texas and Arkansas. The facilities we are acquiring currently collect, compress treat and sell approximately 4.5 Bcf of pipeline quality renewable natural gas each year. And as the landfills continue to grow that production number will continue to grow at approximately 3% annually, with minimal required capital investment. RNG fundamentals are strong in the United States, and indicate continued growth in demand over the long-term as gas utilities increasingly continue to set R&D blending targets. This was the perfect opportunity to meaningfully add to our RNG portfolio with an accretive Enbridge like tuck-in, which has long-term full volume off-take agreements with Shell Energy North America and BP.

Unique to this deal and in keeping with our commitment to protect our balance sheet, we’ve staggered the purchase price over 24 months. This transaction represents a uniquely derisked portfolio of operating scalable RNG assets that add immediate accretive DCF to Enbridge and accelerate progress towards our energy transition goals. Finally, both this transaction and the increased ownership in the Hohe See and Albatross operating wind power facilities were fully contemplated when we announced the acquisition of the 3 gas utilities. Now let’s turn to Pat to walk through the quarterly financials.

Pat Murray: Thanks, Greg, and good morning, everyone. I’m happy to announce that continued strong operational performance led to record third quarter EBITDA, which is up 3% year-over-year and DCF per share, which is also up 2% year-over-year. In liquids, our systems remain highly utilized, the mainline transported just under 3 million barrels per day, a record for third quarter volumes. In the Gulf Coast, Ingleside also posted record volumes, and we realized a full quarter of contributions from the increased economic interest in Gray Oak and Cactus II. Overall, strong operating performance in liquids was partially offset by the lower toll on the mainline, which took effect on July 1. Gas transmission is down slightly, primarily due to lower ownership interest in DCP Midstream following our transaction with P66 last year.

Performance at the utility was down slightly as well due to the reversal of storage and transportation favorability that we noted for investors earlier in the year would occur over Q2 and Q3. Our renewable business performed in line with expectations. We benefited from development fees earned on generation projects from our North American renewable onshore development acquisition in 2022, partially offset by lower wind resources year-over-year. Energy Services results improved versus 2022 due to expiry of transportation commitments earlier in this year and lower commodity backwardation. Below the line in DCF higher interest expense, the timing of maintenance capital and higher NCI distributions to our Athabasca Indigenous investment partners offset some of the EBITDA benefit this quarter.

Our results once again underline the low-risk nature of our businesses and the predictability of our financial and operational results that support our capital structure. With that, let’s talk about how we’re tracking the guidance. Greg mentioned, we’re reaffirming our 2023 financial guidance again this quarter. Our business outlook remains unchange, and we continue to expect high utilization across our asset base. We’ve executed a number of tuck-in acquisitions throughout the year which will contribute to our fourth quarter EBITDA, but we expect these tailwinds to be offset by the impact of the lower mainline toll and the equity pre-funding of the U.S. gas utilities. All told, we expect to finish the year with another quarter of strong operating performance, which, alongside our risk management initiatives, provides us confidence that we will achieve the full year guidance laid out for you last year, even when taking into account the equity issuance in early September.

Let’s turn to our medium-term outlook, which we’re also reaffirming. As we look forward, business optimizations remain a key area of focus for us, and we’ll continue to look for opportunities to optimize within our upcoming rebasing framework and mainline agreements. In the second bucket, the LDC acquisition bolstered our secured organic growth projects by adding an incremental $1.7 billion of low-risk annual rate base investments post closing. And finally, we are judiciously deploying our investment capacity. We’ve added another $2 billion of tuck-ins this quarter with the additional ownership of Hohe See and Albatross wind farms and the R&D assets, bringing us to $3 billion for the year. We continue to execute the strategy we laid out at Investor Day and allocate capital to deliver the quality growth we committed to.

Prudent capital allocation is core to our value proposition, and we will continue to evaluate opportunities for organic growth and opportunistic tuck-in M&A that maximizes shareholder returns. Let’s move on to our capital allocation priorities, which continue to follow a deliberate and disciplined approach. While we’ve been active in the M&A space, each transaction fits very well into our long-term strategy and add additional low capital utility-like growth to our portfolio. The funding plans we have laid out highlight our continued commitment to our stated guardrails. We carefully structured the financing of the U.S. gas utilities to be flexible and as importantly, to maintain our leverage within the 4.5x to 5x range. Furthermore, the plan articulated in September during the announcement of the LDC acquisition, had contemplated additional tuck-ins before the end of the year.

The associated incremental low-risk cash flows will help to preserve our balance sheet strength and support our growing dividend for years to come, while staying within our DCS payout range of 60% to 70%. And as always, we are constantly evaluating opportunities to recycle capital at attractive valuations. Let’s turn to our secured capital. Today, our secured growth program sits at $24 billion. New to our backlog this quarter is the addition of $1.7 billion of annual rate base investment and announced U.S. Gas Utility post closing. We concluded a 3-year program, keeping with how we present our Ontario utility growth program but we expect that level of annual investment to continue through the decade. By the end of the year, we expect to place approximately 3 million of organic capital into service, primarily through our Ontario customer additions and GTM modernization program.

Our robust secured growth program is diversified geographically across our business units and is expected to be deployed over the next 5 years. This diversity of location, timing and business unit helps mitigate against the impact of delays or inflation on any one single large project. And with that, I’ll turn it back to Greg to close the call.

Greg Ebel: Well, thanks very much, Pat. And as we wrap up for your questions. I want to leave you with a few key takeaways. Enbridge’s resilient low-risk business model is supported by our scale, diversification and high-quality cash flows, which enables us to deliver reliable growth in all market cycles. Balance sheet strength is always a priority for us, and we are committed to our debt-to-EBITDA range of 4.5x to 5x while continuing to return capital to shareholders through sustainable dividend growth. As we discussed today, the U.S. Gas Utility acquisition will enhance each of these takeaways by adding regulated earnings that enhance our cash flow quality, increased credit worthiness and underpin our dividend growth for years to come.

Our visible growth backlog, incorporating conventional infrastructure investments and lower carbon opportunities supports long-term shareholder return and positions us as a first choice investment opportunity. Finally, let me let you know that we will be releasing our guidance at the end of November for next year, and we will be hosting our Annual Investor Day in New York in March of next year as well. We look forward to seeing you there. But until then, thank you very much, and we look forward to taking your questions. I think we’re ready now to open up the lines for those questions.

See also 13 Best Warren Buffett Stock Picks for Beginners and 12 Best Micro Cap Stocks To Invest In.

Q&A Session

Operator: [Operator Instructions] Our first question is from Robert Kwan with RBC Capital Markets. Your line is open.

Robert Kwan: Hey, good morning. If I can just start with capital allocation and specifically just the thought process around how you’re looking at leverage and the tuck-in deals you’ve announced in light of the acquisition financing that’s still outstanding and just given the current market environment. And I guess just one thing specifically. You mentioned the tuck-ins were contemplated as part of the utility disclosures. So if you can just confirm that the chart you had that had leverage kind of around that midpoint at the high end, 4.75 that these deals would not be taking leverage into the high end of the range.

Greg Ebel: Yes. Sure, thanks, Robert. And yes, definitively, that’s exactly what we contemplated. So these – both before – during the utility acquisitions and now, that is still where we are. I think equally important to we’d obviously run by those possible transactions with rating agencies, etcetera, as well. So and then from a capital allocation perspective, I think maybe just going back and thinking about we’ve been very deliberate over the last couple of years to swiftly amasodically move the corporation to a much less risky setup in a very utility leg setup, right? So recall that we first sold the Canadian G&P assets. We then went down the root of lowering our position in DCP, swapping those positions for very utility-like pipelines, lowering both any volume exposure and commodity exposure and then went on to achieve this year, what is really a utility-like mainline toll settlement and then next, the utilities as well.

And then these transactions that we announced today fit very much in that same vein, long-term contracts, great offtakes, and the same on the – with the German power projects and the same on the RNG facility, which is a little bit unique. Not everybody would do that with RNG, but we felt that’s really important. And that’s because that supports the 4.5 to 5x debt-to-EBITDA structure and continues to allow us to pay out dividends in that 60% to 70% payout range. And yes, so I’ll leave it there, Pat, do you want to add anything to that?

Pat Murray: One thing I might add is that, as you mentioned, that 60 to 70 payout range, we brought that down over the last few years or 2, so it’s at the midpoint, which should allow us to continue to grow dividends up to the level that we grow cash flows over the next go up.

Robert Kwan: That’s great. If I could just finish – excuse me, with the RNG strategy. Just where do you this business going for you? Did you see this acquisition as being more opportunistic or something that you want to build upon in similar sizes? And I guess, just generally, can you just talk about these facilities? Are they general landfills? And how do you think about just with the increasing separation of organics away from general landfills, what the risk there might be?

Pat Murray: For sure. And Cynthia is here. So maybe I’ll let Cynthia start with that.

Cynthia Hansen: Sure, Robert. Thanks. So we’re, as you know, excited about this RNG opportunity and because, as Greg noted, this is an opportunity for us to have a utility-like return. So these are unique assets. And the market is fairly large and growing. So overall, R&D, I think last year, ‘22, there was 75 Bcf in North America. It’s growing to around 95. So there is lots of growth, but again, we will be very disciplined with how we look at the opportunities. What we like about tomorrow is that it positions us as a leader in the space and that will understand and continue to be able to evaluate future growth opportunities. So it is a unique asset. There will be other opportunities like that. But again, the discipline required to make sure it fits the type of utility like structure and our ability to have those offtake agreements will be critically important as we go forward.

Robert Kwan: Your thoughts on general landfill versus targeting something that is specifically organic?

Cynthia Hansen: Yes. So you would remember that we had invested in Diverge earlier this year, which specifically addresses the food weight component. So when we look at this opportunity, where this landfill or these seven landfills are located. There is a lot of growth opportunities just there. And as Greg said, there is an embedded kind of 3% growth with very little capital outlay. So you do have to be looking at where the landfills are located. And fortunately, these assets are in geographic areas in Texas and Arkansas, where we’re going to see that growth. So we’re not concerned that there is going to be any kind of cannibalization of that kind of other food waste growth.

Robert Kwan: That’s great. Thank you.

Greg Ebel: Thanks, Robert.

Operator: The next question is from Theresa Chen with Barclays. Your line is open.

Theresa Chen: Good morning. Greg, I wanted to ask about the remaining funding options for that $4.5 billion related to the gas utility acquisitions. Can you talk about your order prioritization for those really four tools in the toolkit? And specifically related to the asset sales. Can you just help us think about valuation, execution in this market as you rotate capital and optimize the portfolio, given that there are other assets from some of your competitors are in the market as well?

Greg Ebel: Yes, for sure. So yes, let’s start there. Recycling is always have been an important part of the financial complex and methodology here at Enbridge. So – and I wouldn’t just think about it as a sale of assets. Think about things like some of our partnerships that we’ve done with indigenous communities, we did that last year. Those continue to create really great opportunities for us to recycle capital and still, frankly, be involved in the projects and maintain operational strategic control. So that’s an element. Yes, and you look across the size of the company, we’ve got various pipe assets. You can look at wind assets and renewables. I don’t think we are restricted in any way, shape or form in terms of what we will look at.

And you’re right, there is a market out there for selling assets, but we think the way that we’ve structured virtually all of our assets now that they are low risk utility like and will be very attractive, as opposed to, say, selling G&P assets in this type of market, that’s one. And then two, is we still got some hybrid move ability in there. It’s something, obviously, we will look at in unsecured notes. And then we do have the possibility of using the DRIP in the ATM. So that’s probably the route I would go down. But again, you’ve got to judge this based on what you see in the economic environment from a macro perspective. What I’m really happy about is we are a long ways down the trail of securing that financing, and it will be into ‘24 and target, say, the end of ‘24, we have all these assets in the house.