Enbridge Inc

Welcome to the Enbridge, Inc. Third Quarter 2020 Financial Results Conference Call. My name is Michelle, and I will be the operator for today's call. 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. During the question-and-answer session, if you have a question, please press star 1 on your touchtone telephone. Please note that this conference is being recorded. I will now turn the call over to Jonathan Morgan, Vice President, Investor Relations. Jonathan, you may begin.

Thank you, Michelle. Good morning, and welcome to the Ember Jink Third Quarter 2020 Earnings Call. Joining me this morning are Al Monaco, President and Chief Executive Officer, Colin Grunding, Executive Vice President and Chief Financial Officer, Vern Yu, Executive Vice President, Liquids Pipelines, Bill Yardley, Executive Vice President, Gas Transmission and Midstream, Cynthia Hansen, gas distribution, or executive vice president gas distribution and storage. As per usual, this call is webcast and I encourage those listening on the phone to follow along with the supporting slides. A replay of the call will be available today and a transcript will be posted to the website shortly after. We're going to try to keep the call to roughly one hour, but we'll allow for additional time if necessary. In order to answer as many questions as possible during the Q&A, we ask that you keep to a single question and rejoin the queue if you have any follow-ups. and we'll do our best to get to each of you. As always, our investor relations team is available for any detailed follow-up questions after the call. If you are a member of the media, please direct your inquiries to our communications team and we'll be happy to respond. On to slide two, where I'll remind you that we'll be referring to forward-looking information on today's call. By its nature, this information contains forecast assumptions and expectations about future outcomes which are subject to risks and uncertainties outlined here, and discuss more fully in our public disclosure filings. We'll also be referring to non-GAP measures summarized below. With that, I'll hand it over to Al Monaco.

Thanks, Jonathan, and good morning. I'll depart from the usual process here today and kick things off with how we're thinking about the broader energy environment. So the fundamentals, the energy transition, and the resiliency and longevity of our cash flows, no matter what the pace of the transition is. I'll provide a brief business update today, then Colin will take you through the financial review. And given the interest in capital allocation, he'll talk about our framework and our current thinking. I'll come back at the end and outline the new ESG targets we announced earlier. And just before we begin, a quick comment on the results. Q3 was strong, so we're on track with the 2020 guidance, and we're narrowing that down to the midpoint of our 450 to 480 DCF per share range. That outcome proves out, once again, the utility model. We operate in the face of the worst industry downturn ever, and part of that ability to achieve the range comes from our ability to have moved quickly on reducing costs by $300 million this year, and we're now projecting $400 million for next. On to the energy outlook. Big picture, our outlook is based on three unassailable facts. First, Global energy demand will rise in the next two decades driven by population growth and increasing middle class and urbanization. Developing countries by themselves will need at least 35% more energy. And we think North America has a great opportunity to increase global market share of supply simply because we have the best resources, technology, infrastructure, and environmental standards. Second, the return of economic growth will depend on affordable and reliable energy. That's always been the case over history and won't change. And third, no matter what future demand looks like or what kind of energy we're talking about, we need existing infrastructure, replacements, and new build. It's also true, though, that we're transitioning to a lower carbon intensive economy. You can see that in the fundamentals as well, and we all know the reasons for it. but it's clear to us that the energy transition will be gradual. Here's a snapshot of the fundamentals and how we look at the pace of transition. The recent IEA forecast shows energy demand growing and a slightly shifting supply mix. Now, you've all seen a number of new forecasts come out lately, and we've shown the range of those here, and you can see there's a fairly homogenous outlook over the next couple of decades. Supply mix changes a bit, Coal declines, no surprise there. Oil and gas increases and continues to make up over half the mix, while renewables moves at a fast cliff from a low base. The point of this is that we're going to need all sources of supply in our view to meet demand through at least 2040 and very likely beyond. But we push ourselves on whether demand and supply mix could look markedly different if we transition faster. So on the right, We've laid out what's being done today and what's embedded in that outlook that we showed. And it assumes all announced policies to lower emissions are implemented as scheduled. Energy efficiency improves 2% annually. We spend $35 trillion on new infrastructure, roughly double, and 150 gigawatts a year of solar capacity added versus 85 per year today. EV adoption climbs to 15% of the fleet's or 300 million vehicles versus 1% today. Now everybody's motivated to see this happen but it's not going to be a cave walk by any means and without these actions consumption of energy is very likely to be higher and the mix change a lot slower. Now a more radical change in consumption is possible but not by 2040 in our view. For example we need more aggressive and globally synchronized policy and significant carbon prices. Doubling of efficiency approaching the limit of 4%, increased solar capacity adds by another 65 gigawatts annually, and tripling of the EV fleet to 45% by 2040. So the next slide gets to why we believe we'll need conventional energy for a very long time to come. Oil demand continues to rise and stabilizes, and that's driven by accelerating growth in developing countries, increasing PETGAM demand, I think everyone understands the reasons for that, and oil retains a large share of the transport market. We're even more convinced today, though, that natural gas will dominate global energy, and some people call this the bridge, but it's going to be, in our view, an awfully long bridge. That's simply because gas is abundant, low-cost, has excellent load following capability, storability, lower emissions, and it's crucial to renewables intermittency. We expect roughly 40 TCF per year of new industrial and power gen demand. And RNG are going to be real, and we'll explain our strategy on this in a minute, but unlikely to come into play in a material way before 2040. And of course, renewables are going to continue to grow as it's clear they are competitive. So that's the macro view and why the energy transition will happen gradually, in our opinion. The next few slides illustrates how we're positioned in terms of the resiliency and longevity of our cash flows in whatever transition scenario unfolds, and it begins with our low-risk business model. Most important to that is the diversity of cash flow by business line, commodity, and geography, and we have over 40 sources of cash flow. The diversity you see here is the key to us powering through the pandemic that you're seeing today. Our business has strong commercial underpinning, the best customers, and a solid balance sheet. And all of that has allowed us to generate steadily increasing cash flows in all cycles, commodity price downturns, the financial crisis, upstream disruptions, and now COVID. We hear a lot about terminal value risk today, so let me illustrate why we're confident in the longevity of our cash flows starting with gas transmission. Here we serve 170 million people with last mile connectivity to the US Northeast, Southeast, Midwest and West Coast. These customers and the utilities that serve them aren't going anywhere anytime soon. We're also connected to global export markets through LNG, so that's a good upside for us post COVID. The yellow dots here show how crucial our gas system is to replacing coal, but also in meeting future U.S. Northeast offshore renewable power balancing requirements. The business has long-term contracts, cost of service, and regulatory protection. Revenues are mostly 100% reservation-based, and contracts are serially renewed for term year after year. In fact, Bill just concluded the renewal process at 99% for Tetco and Algonquin contracts, So clearly our customers believe in the longevity of our gas system and pipes generally. On to slide nine, we look at our gas utility the same way. It's an integrated transmission, storage, and distribution network serving the fifth largest population center in North America, and those customers aren't going anywhere either. You can see here on the bottom the competitive advantage that gas holds over the alternatives. It's a cost of service business as well. To put its resiliency into context, in order to replace Ontario's peak energy day needs with 100% electricity, you'd need to add 85,000 megawatts of new capacity, or three times the current level. And we don't see that happening anytime soon either. And finally on liquids, this is the quintessential demand-pull business. It's directly connected to refineries that need our feedstock. Our scale at 3 million barrels a day gives us a total advantage, and cash flows are supported by long-term contracts that push and pull volumes through the main line. But the linchpin to the longevity of cash flow is the globally competitive refineries we serve. So let me just explain that on the next slide. The chart on the left shows the Nelson Index for global refiners. Higher in this case means they're configured to run heavy crudes that maximize margins and returns. The refineries we serve in the Gulf and the Midwest are the most complex, which along with their scale makes them highly competitive. So those refiners are going to be around for a long time as well, no matter what scenario unfolds. What's really unique here for us, though, is shown on the right. Heavy is going to be in shorter supply as Mexico and the rest of the world decline. the only sources of heavy growth are the Middle East and Canada. That's why Canadian barrels with big growth potential and proximity to US markets are ideally positioned. So these two realities that you see here not only support the existing mainline cash flows, but provide a great opportunity for us to grow market share. So what we've just gone through on our core assets illustrates the resiliency and longevity of our business for a long time. Now let me talk to our approach on the energy transition itself. That approach really comes down to two things. Aligning our asset mix to long-term fundamentals and creating what we call low cost, no regret options that position us for the future in a way that doesn't mess with our low risk business. Our liquids business allowed us to capture massive growth in crude infrastructure when it was there And today, we have the best crude network in North America, and we'd argue globally. At the same time, though, we diversified our business into gas and renewables. In 1996, we had a strong view on the future of gas, so we acquired what is now Enbridge Gas Utility. Four years ago, we acquired Spectra, which gave us a massive transmission platform and another great gas utility alongside it. Along that road, we embedded options to adapt to changing fundamentals and capture long-term growth. We built our first onshore wind project two decades ago. That was a no regret move because it came with a long-term PPA that ensured a good return. That one initial option allowed us to learn the business and after many other projects, led to our first offshore wind project in Europe. We've applied exactly the same approach to RNG and hydrogen, which is why we're ahead of the curve on those two. The pies then at the bottom here illustrate the gradual approach to diversification that has aligned us well with the global supply mix. And during all of this, we optimized our business by driving out costs, selling assets that didn't fit, simplifying the structure and bolstering our financial position. The next slide shows how we're set up today for the future. Our wind and solar assets are in North America and offshore Europe. We've built development, construction, and operating capability, and renewables is now the fourth Enbridge platform. Today we have 1,800 megawatts of capacity net to us, so that's sizable. And the plan is to continue to grow this business in the same way we have, which is organically at a reasonable pace. We are going to be disciplined in this part of the cycle, given the frothy private and public valuations that you all see out there. And if we can't find good opportunities, we're not going to stretch our return threshold. In fact, we recently turned away a couple of opportunities that didn't make sense for us. That's fine, and we've got enough in the inventory to keep us busy for the next five years. Finally, on this topic, we have some excellent low-cost options in play to capitalize on the longer term, similar to what we did on renewables. We'll get to these more at Enbridge Day, but here's a preview of what we're working on. RNG represents an opportunity to grow gas volumes and leverage our own utility and GTM franchises. We have six RNG projects operating and in construction. These are in the upgrading and injection end of the RNG value chain and more planned, all of which are either included in rate base or have long-term contracts so they fit the overall business. There's been a lot of talk about hydrogen and its obvious merits, the economics in our view for blue and green. are challenged right now, but support will increase and costs are bound to come down, so another good long-term opportunity for us to capitalize on our infrastructure. We've piloted North America's first power-to-gas facility, which uses an electrolyzer to convert water to hydrogen. The plant is contracted to provide grid stability for the ISO to capture off-peak renewable power. In fact, we've just received approval for Phase 2 now, to blend hydrogen into the gas stream, which of course lowers carbon intensity and is used for storage and re-electrification. Related to that is a potentially large application of hydrogen, which is blending in the gas stream all across our transmission network. So excellent marriage here between new technology and our existing infrastructure. I think the takeaway here is that we're ahead of the curve on some of the good long-term opportunities where technology has already been proven out. So we're not too far out on the technology scale. And I think we're doing it in a way that aligns with the pace of transition that we see. So before I hand it to Colin, just a brief business review, starting with liquids. Recall, we're cautious on volumes fully returning from COVID. And it turns out that we were right with that forecast. Our Q3 mainline throughput, we ended up at the point where we were forecasting at 2.55 million barrels a day, and that reflected the upstream outages at Suncor's base plant and Curl, so that was a good outcome actually. We also returned to heavy apportionment, and we've been full up on heavy capacity since July. That goes to the strong demand in our core markets that I mentioned earlier. On lights, as economic activity continues to ramp in eastern Canada and the Midwest, we'll see those come back. For Q4, we see heavy capacity fully utilized, so we should be tracking to the Q4 range of 2.55 to 2.75 that we forecast last time, and that accounts for second wave impacts. And you see the Q1 range here at 2.65 to 2.75 next year. Now, one thing Vern and his team have been working on is filling up some of that light capacity in the interim with medium blends, so that's a good outcome when it happens. Lastly, Liquid started construction of its first self-powered solar gen facility in southern Alberta, and we're looking to apply this to a broader scale. On line three, we're in the late innings here on permitting, so we've narrowed the milestones chart that we normally show to what's left to do. The PC regulatory process in Minnesota is basically done except for authorization to construct after permits are in hand. And on permitting, the PCA contested case finished up with a positive ALJ decision. That's important because it clears the way for the PCA 401 permit decision by next week's statutory deadline and the Army Corps 404 after that. The DNR and the Corps continue to work on those permits and actually we received a couple of the DNR permits already. So no change really to construction timing at six to nine months once we get all the permits. On gas transmission, Bill and team have been working on a comprehensive maintenance and integrity program across the system. TETCO eastbound capacity has now been restored and southbound should be back shortly. Rate proceedings are underway on Alliance East Tennessee, and Maritime has been a busy year on the rate side. As you can see, the team has a healthy slate of high-quality projects in construction which are moving along well, and good cash flow coming on those in the next year or two. And finally, our first solar power installation came online at Lambert Field in New Jersey, and a second is scheduled for next year. On gas utility, this is slide 18, they put up good numbers and continue to deliver growth. I think Cynthia and her team have done a great job on synergy capture from merging the two utilities. In the last year, we added 40,000 customers and more to come by extending the franchise to new communities. Recently, FID did a new $160 million project to replace two lines, so again, right down the middle of the utility fairway. And finally, we did break ground on Ontario's largest landfill RNG facility in Niagara Falls. By the way, the regulator just recently approved a program for customers to choose RNG supply, and that's a good signal in our view. Finally, on the renewables business, we have three operating projects in the UK and Germany, good progress on our four French projects as well. Two of those, Saint-Nazaire and Ficompe, are in construction and on schedule for in-service in 22 and 23. Just looking at the nacelle photo you see here, you get a feel of the scale of these projects and the equipment, which is partly the reason why offshore renewables are competitive today. We've got experienced partners in this business, and our joint venture with Canadian Pension Plan helps us optimize capital and returns. So now, over to Colin.