Enbridge Inc. (NYSE:ENB) Q4 2022 Earnings Call Transcript

Enbridge Inc. (NYSE:ENB) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Ladies and gentlemen, welcome to the Enbridge Incorporated Fourth Quarter 2022 Financial Results Conference Call. My name is Abby and I will be your operator for today’s call. Please note that this conference is being recorded. I will now turn the call over to Rebecca Morley, Director of Investor Relations. Rebecca, you may begin.

Rebecca Morley: Thank you. Good morning and welcome to the Enbridge Inc. fourth quarter and year end 2022 earnings call. My name is Rebecca Morley and I am the Director on the Investor Relations team. Joining me this morning are Greg Ebel, President and CEO; Vern Yu, Chief Financial Officer and President of New Energy Technologies and the heads of each of our business units: Colin Gruending, Liquid Pipelines; Cynthia Hansen, Gas Transmission and Midstream; Michele Harradence, Gas Distribution and Storage; and Matthew Akman, Renewable Power. As per usual, this call is being webcast and I encourage those listening on the phone to follow along the supporting slides. We will try to keep the call roughly to 1 hour. And in order to answer as many questions as possible, we would appreciate you limiting your questions to one plus a single follow-up as 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 additional questions. On to Slide 2, where I will remind you that we will be referring to forward-looking information on today’s presentation and in the Q&A. By its nature, this information contains forecasts, assumptions and expectations about future outcomes, which are subject to the risks and uncertainties outlined here and discussed fully in our public disclosure filings. We will also be referring to non-GAAP measures as summarized below. With that, I will turn it over to Greg Ebel.

Greg Ebel: Well, thank you very much, Rebecca and good morning everyone. I am excited to be here today to review our fourth quarter and our record full year 2022 and financial results. It was another solid quarter and year. So let me start off by doing a recap of our accomplishments in 2022, including, as you will see on this slide, our Saint Nazaire project. This is France’s first operational offshore wind farm and it came into service in November on time and on budget at approximately €2.4 billion. It’s providing 480 megawatts of electricity, enough to provide 700,000 people of electricity every year. I will also spend a few minutes discussing some of the key strategic advancements from our four core franchises. And then Vern will walk you through the financial performance and outlook.

And then I will come back and close it a little bit on what you can expect to hear at our upcoming Investor Day. And of course, the Enbridge team is here to address any questions at the end. Before we get into the highlights, let me spend a minute or two sharing why I am excited to be leading this great company moving forward. For me, it starts with the people. As Chairman, I had a great opportunity to get to know many of the Enbridge team that I have not previously known. And in the last few months, I have met with employees at all levels across the business. Their passion is evident in their delivery of life giving energy that people depend on and they do it everyday, safely and reliably. I have no doubt we will build on this legacy, deliver top-tier performance and continue to grow this great company.

And like many of you, I am passionate about the energy industry. We all know it is the backbone of our society. Access to safe, secure, affordable energy supports economic development and well-being. Today, the sector is at an inflection point. We must support the transition to lower carbon future, while at the same time, ensuring we are delivering safe, secure and affordable energy. Enbridge is right at the center of it. We are uniquely positioned to lead in the energy transition and continue to deliver reliable energy to our customers. As this slide demonstrates, we have an extensive asset footprint that allows us to realize synergies across our four core franchise. Our business is highly diversified and is underpinned by low-risk commercial frameworks.

Our franchises are largely demand pulled and we serve the best markets across North America and increasingly in Europe. And we have demonstrated over our history, an ability to adapt, wisely allocate capital and capitalize on evolving market fundamentals, growing our natural gas franchise, investing more than two decades ago in what were then the emerging renewable energy technologies of wind and solar. Our balance sheet is in great shape and we have good visibility to cash flow growth. Combined, this will allow us to continue to deliver strong risk-adjusted returns to our shareholders through all market cycles and allow us to build on our tremendous track record of steadily growing our dividend. I am excited by the passion of our people, the strength of our company and by the investment opportunities that we have in front of us, both on the conventional and lower carbon fronts.

So, let’s move to our 2022 highlights. The year was indeed another solid one for Enbridge. We continued to lead on safety and reliability. In total, we invested over $1 billion on the integrity of our systems. Our balance sheet is in great shape, BBB+ rated and comfortably within our debt-to-EBITDA range of 4.7x. We have placed $4 billion of growth capital into service and secured an additional $8 billion of new capital projects, including investing in liquefaction through our investment in the Woodfibre LNG project and we continue to be good stewards of capital, releasing close to $2 billion of asset value from our regional oil sands assets and DCP Midstream. That brings us to $11 billion in capital recycling to help fund high-grade opportunities since 2018.

We made great progress on our ESG goals, increasing diversity, establishing new indigenous partnerships and advanced emission reductions across the business. Now, let’s spend a few minutes on key accomplishments of each of our businesses, starting with liquids. Our liquids business delivered record utilization in 2022 with the Line 3 replacement project being put into service in late 2021. Our Mainline is running full. Average daily throughput was 2.96 million barrels a day for 2022. And February and January of 2023 will exceed that as we hustle to move every barrel we can for our customers. We continue to have constructive dialogue with our customers on its successor Mainline incentive tolling agreement. As you know, these discussions take time and we are working with a subgroup of shippers to land on a new framework.

Once agreed upon, we would then take it to the broader shipper group for a vote on the proposed agreement before filing it with the CER. Now should we be unable to come to an agreement then we are fully ready to file the cost of service with the CER, which would actually reduce our risk and make us even more utility like. It’s important to note that we have been factoring the impact of TMX into our financial and operational outlook for a long time. We expect the Mainline will remain well utilized once TMX is in service, and we are talking to our shippers about the impact of TMX and it will be accounted for in either commercial tolling outcome. In addition, we expect to see growth in the basin between now and 2030. As the basin grows, our system will fill back up.

In 2022, we extended our light oil strategy by increasing ownership to 68.5% in the Gray Oak pipeline through multiple transactions and increased Cactus II pipeline ownership to 30%, both of which help connect the Permian Basin to our Ingleside terminal. We sanctioned another 2 million barrels of storage at Ingleside, which will unlock already built docks loading capacity for further export. I think we are starting to see and to create a real value-added super system out of the Permian region for our customers. Beyond having the ability to move product for our customers on two pipelines, we have the number export terminal and the capacity to let them access premium markets for their oil. We also advanced several exciting low-carbon opportunities, including the development of a hydrogen ammonia plant at the Ingleside terminal and the JV with OxiClean Carbon Ventures to develop a carbon capture hub in Corpus Christi.

I think there are some really exciting times coming for our Gulf Coast connected liquid assets. These low carbon opportunities on the Gulf complement our CCS plans in Alberta, where we are leading the development of the Wabamun Carbon Hub with close to 4 million tons of CO2 already secured for sequestration. And we are advancing our self-power power strategy with 7 projects in construction at our pump stations with more on the way. Lastly, we executed a landmark transaction with 23 indigenous communities in Northern Alberta, selling roughly 11% stake in the regional pipeline and storage assets. With this transaction, we have strengthened our relationship with neighboring indigenous communities and serve the strong value for reinvestment. We see this as an ideal framework for future partnerships and as a tool to recycle capital, more on that and our Gulf Coast retail plans at Enbridge Day in March.

Moving to gas transmission, we had another excellent year. Our systems were highly utilized, in particular during the winter storm Elliott. We continue to demonstrate our reliability by reversing the flow of our Texas Eastern system to supply much-needed gas to the U.S. Northeast. The net swing of close to 3 Bcf was instrumental to avoiding potentially devastating impacts to our customers and underlines our competitive advantage in serving customers in changing environments. During the year, we also achieved positive rate settlements on the TETCO and BC Pipeline systems. And further underpinning the value of our pipeline system, all contracts up for renewal in 2022 were successfully recontracted. We placed $900 million into service, including modernization projects and our Vito offshore pipeline system.

Our natural gas export strategy continued to play out as we began construction on our Venice extension projects serving Plaquemines LNG. In addition, our investment in Woodfibre LNG has helped spur new investment along our BC Pipeline system, where we secured another $4.8 billion of expansions on T-North and T-South. As you will recall, these projects earn under a cost of service framework. And given that they consist of Brownfield construction on existing right of ways, they have considerably lower capital cost risk. Overall, we see tremendous potential for North American LNG to meet global demand for secure lower carbon energy and we are engaging with governments in the United States and Canada to advocate for permitting reforms to support development.

We also further reduced our exposure to commodity prices by decreasing our economic interest in DCP and in favor of a higher interest in the Gray Oak pipeline that is highly contracted. This was another good example of recycling capital to lower volatility and better risk/reward investments. Turning to our gas utility, they had another strong year with approximately 46,000 new customers added. We put $1.2 billion of expansion capital into service in 2022, which supports the continued growth of our rate base there. And we filed a new incentive rate application for the period 2024 to 2028. We have a long track record of working under incentive rate mechanisms that provide quality, safe service and predictable rates for our customers while also allowing us to achieve our premium return within the return parameters set annually by the LEB.

Photo by Quinten de Graaf on Unsplash

Michele will have more to say on this important initiative at our Enbridge Day in March. Our Dawn Hub and transmission systems continued to perform well, particularly in December, as winter storm Elliott wreaked havoc on North American markets. Our integrated Dawn storage hub was able to reliably provide gas to the market, which helped to stabilize prices. In fact, just before Christmas, it was able to deliver a record 6.1 Bcf of gas to the market in a single day. The distribution team continues to progress our RNG strategy with two new projects sanctioned, bringing the total to 8 in service or under construction in Ontario. We are also seeing encouraging performance from the 2% injection of hydrogen into the gas stream in Markham, which serves 3,600 customers with low carbon or lower carbon natural gas.

While we are still studying the impacts, we are also exploring the merits of extending this strategy to more customers. Looking at our Renewables business, 2022 was a pivotal year for that segment. We placed the first of 4 offshore wind projects into service in France on time and hit the €2.4 billion budget, quite an accomplishment in this market. We have 3 self-powered solar projects in service and another 10 under construction, which will produce 113 megawatts of power for our liquids and gas transmission businesses. Lowering Scope 2 emissions and we acquired a top renewable developer in North America, Tri Global Energy. The acquisition brings near-term cash flow from the sale of 3.9 gigawatts of advanced projects over the next couple of years.

And the Power team has over 3 gigawatts of new development in progress that we expect to enter service between 2025 and 2028 with more beyond that timeframe. The 3 gigawatts represents $3 billion to $5 billion of potential growth capital investment for Enbridge. Our combined expertise will help us accelerate our North American onshore renewables strategy, taking advantage of the incentives announced in the Inflation Reduction Act. So really fine 2022 for all the business units, which translated into record financials and sets us up for future growth. So, let me now turn it over to Vern, who will walk you through those financial results and outlook.

Vern Yu: Thanks, Greg and good morning everyone. A strong fourth quarter capped off a record year for us. We exceeded the midpoint of our DCF guidance range and we finished at the top end of our EBITDA guidance range. Strong operational performance resulted in a 6% increase in EBITDA and a 7% increase in DCF per share quarter-over-quarter. Our full year EBITDA increased by 11% over 2021 and our DCF per share was up 9%. During the quarter, we saw record Mainline volumes of 3.1 million barrels per day. Export volumes at Ingleside continue to grow throughout the year and we continue to enhance our U.S. Gulf Coast footprint with increased ownership in Gray Oak and Cactus II. Gas transmission utilization remained high and we have increased our revenues with the recent rate case settlements at Texas Eastern and at the BC Pipeline.

Q4 also benefited with a full quarter of operations from our T-South and Spruce Ridge expansions. The utility was up with strong customer growth rate escalations and some slightly colder weather. The renewables business was down slightly in the quarter due to lower U.S. wind resources, the timing of annual operating expenses, which was partially offset by strong European power prices. Energy Services remained challenged in the quarter due to tight basis differentials and backwardation. But as a reminder, we expect Energy Services to return to profitability this year. The quarter also benefited from a stronger U.S. dollar. DCF in the quarter reflected higher distributions from our Alliance and Gray Oak joint ventures offset by higher interest expense, cash taxes and the annual timing of maintenance capital.

Let’s take a moment now to remind ourselves on how we have built a business that’s resilient in all market cycles. The financial markets continue to be extremely volatile. Inflation is driving central banks to raise rates stoking the potential of a recession. Enbridge continues to be well-positioned to navigate through these risks. Our low-risk business model is built on minimizing our exposure to market price volatility and provides us contractual protection against any of these movements. We have a proven track record of meeting our guidance despite volatile market conditions. This resiliency is once again demonstrated in our 2023 outlook. Let’s move to that now. We are reaffirming our 2023 guidance that we provided last November. We expect the business to perform strongly in 2023 with high utilization across all of our systems.

And we will benefit from the capital we placed into service in 2022 and the additional capital that we placed into service this year. Rising interest rates are a modest headwind in 2023, but this has already been reflected in our guidance. We entered the year with approximately 10% of our debt in floating rates. We are also substantially hedged on foreign exchange. So we are well protected here as well. Our 2023 dividend increase of 3.2% marks our 28th consecutive annual dividend increase. And our dividend payout remains in the middle of our target range. We continue to prioritize the balance sheet and are targeting to exit 2023 in the lower half of our 4.5x to 5x debt-to-EBITDA range. At Enbridge Day, we will provide more detail on our medium-term growth outlook, so please join us for that.

I am now going to move on to our secured growth program. Today, our secured capital program sits at $18 billion. We had $4 billion capital enter into service in 2022, which will drive cash flow growth in 2023 and beyond. We also added $8 billion to our growth capital program last year, where the majority of this capital comes into service between 2026 and 2028. Our $5 billion to $6 billion of annual investment capacity allows us to fund these projects under an equity self-financing model. Going forward, we have ample investment capacity for more organic growth, tuck-in M&A, debt repayment and share buybacks. So with that, let’s move to capital allocation. It all starts with the balance sheet strength and financial flexibility. Recycling capital into new opportunity is just one part of our strategy to keep our leverage in check.

Our balance sheet doesn’t require us to do so, but we will continue to opportunistically evaluate future asset sales at attractive valuations. We continue to return capital to shareholders sustainably. We pay out about 65% of our distributable cash flow as a dividend. And as you know, we have a long record of growing that dividend. We renewed our $1.5 billion normal course issuer bid, which allows us to opportunistically repurchase shares. Buybacks will, of course, compete with any other capital allocation opportunities, but they will also act as a benchmark for our business developers. We will prioritize low capital intensity and utility-like investments and then deploy any remaining investment capacity to the next available option. All of these opportunities fit our low-risk business model, exceed our risk-adjusted hurdle rates, have a strong strategic fit and align with our ESG goals.

The bottom line is we continue to be focused on maximizing shareholder value. Let me finish off with an ESG update. I am truly proud of our ESG accomplishments in 2022. Most of all, by the work we have done on the indigenous reconciliation. We released our indigenous reconciliation action plan in September, which articulates and tracks our commitments and progress with their indigenous stakeholders. Through the East-West Tie Line, the Wabamun Carbon Hub and the AII Regional Oil Sands equity partnership, we are setting the standard for economic participation with our indigenous partners. We see further opportunities to continue to develop more of indigenous partnerships on both sides of the border. We are finding innovative ways to reduce our GHG emissions in order to executing on our solar cell power strategy that supports both of our liquids and gas businesses.

On governance, we are honored that Pamela Carter has been elected our first female Chairperson. Finally, we issued another sustainably-linked bond in the fourth quarter, bringing our total sustainably-linked financings to over $4 billion. With that, I will turn it back to Greg.

Greg Ebel: Well, thanks very much, Vern. And as we mentioned earlier, we’re really looking forward to spending time with you at our Investor Days coming up in Toronto and New York in March. You will hear that those days from our business unit leaders on the prospects for each of their businesses. They’ll be providing you with views on the following questions. What are the near and long-term fundamentals of the business, how will we continue to drive efficiencies, how we grow our core businesses and invest in new energy technologies while leveraging our existing business positions horizontally across the enterprise? How are we progressing on our ESG goals? In addition, you’ll hear from myself and the team about the positive positioning of our business, our strategic priorities, our capital allocation discipline and our medium-term financial outlook.

We hope to see you there and look forward to a great discussion. Before we take questions, let me wrap up by saying that over the last decade, Al Monaco and the senior leadership team have transformed Enbridge to be the leading energy delivery company. Building off that strength, we’ve entered 2023 with a solid plan and a committed team to continually continue safely and reliably delivering energy across North America and beyond for our customers and our investors. 2022 was an inflection point for our industry. and policymakers as energy security and high commodity prices from underinvestment in energy was put under the spotlight. The need for both conventional and lower carbon solutions to meet the growing demand for global energy will be critical as will our ability to deliver both in an economic and environmentally sustainable way for our customers, our investors and stakeholders at large.

Our business model is resilient, and our low-risk value proposition should make us your first-choice energy investment opportunity. We will demonstrate that as Enbridge day and show you how we will bridge to the energy future by meeting the needs of today, tomorrow and beyond. Thank you for joining us today. And now let’s open up the lines for your questions.

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Q&A Session

Operator: Thank you. And we will take our first question from Robert Kwan with RBC Capital Markets. Your line is open.

Robert Kwan: Hey, good morning. Greg, I guess, first question here for you, just around the Mainlines here. Have you changed the company’s priorities, even if it’s nuance is just part of a potential deal? And specifically, as you think about transitioning the business over time, is there a desire to push for higher of depreciation to both manage the residual value of the Mainline as well as releasing additional capital to rotating to lower-carbon infrastructure?

Greg Ebel: Well, Robert, first of all thank you and Colin is on the line here too. But maybe I’ll start. Yes, I would not see the Mainline negotiations as anything about changing the priorities of the company. As I have tried to speak to the investment community today and we will talk about this in March. I wouldn’t read that into it. I mean, look, by strong belief continues to be that from a North American perspective, it’s about going through and out in the liquids business part of that obviously in a critical component. That will remain from a Western Canadian perspective as we serve those customers, not only in Canada but also their desires to go south. And as we talked about a little bit in the opening comments from the perspective of the Gulf Coast, we’re building what I think is a really great super system there.

So I don’t think it’s a it’s an either/or, it’s an and. So I definitely don’t see the Mainline negotiations has changed in any way in the priorities. This is a great business that earns about $9 billion in EBITDA and will continue to be the backbone of the corporation, which does not take away from the other business units. But specifically, Colin, do you want to speak to some of the comments and questions from Robert?

Colin Gruending: Sure, Greg. Thanks for the question, Robert. Maybe just to build on Greg’s comments, and I’ll give you as much color as I can on the negotiations. It’s obviously premature is big into it too much and it would be disrespectful to our counterparties. But here’s what I can tell you €“ and Robert, you’ve been around in industry for a while and you’ll recognize that we’ve through incentive tolling for 27 years now, seven vintages starting back, right, in the €˜90s. And each one of those arrangements matured build on the previous one added new features, typically added not too many subtractions, but added new features around risk and reward around speaking to ways we can maximize value for industry, right? These €“ just to recap a little bit, these have included initially cost envelopes, then it evolved to batch quality.

It evolved to connectivity. And increasingly now, it’s including ESG stewardship and defense of the system and advocacy. Will we add new features to this one? Likely could include items like you’re talking about. We’re very mindful of the dynamic you surface there and in light of increasing industry risk. So I’d say an incentive arrangement here remains the shippers preference. That’s why we’re negotiating it. I’ll add our bid-ask on the toll component of the arrangement has narrowed meaningfully. But I want to caution that we’re not there yet. We’ve made progress, but we’re not there yet, and we may not get there. And obviously, we’ve advanced and fully prepared the alternative cost link €“ cost of service pass-through model, which should be equally acceptable to us.