Enbridge Inc

Welcome to the Enbridge Incorporated Second Quarter 2021 Financial Results Conference Call. My name is Frenzy and I will be your 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 questions, please press star 1 on your touchstone phone. 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. Good morning and welcome to our Ember Jink second quarter 2021 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 Pipeline, Bill Yardley, Executive Vice President Gas Transmission and Midstream, Cynthia Hansen, Executive Vice President Gas Distribution and Storage, and Matthew Ackman, Senior Vice President Strategy and Power. As per usual, this call will be 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'll try to keep the call to roughly an hour. And in order to answer as many questions as possible, we'll be limiting to one plus a single follow-up as necessary. We'll be prioritizing calls from the investment community, so if you are a member of the media, please direct your questions to our communications team, who will be happy to respond. As always, our investor relations team will be available for any detailed follow-ups after the call. On to slide two, where I'll 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'll also be referring to non-GAAP measures summarized below. With that, I'll turn it over to Al Monaco.

Okay, thanks Jonathan. Good morning everybody. Well, first, just to kick it off, as you see on this cover slide here, it really illustrates one of the key points we'll be speaking to today, which is the strong recovery that's underway right now. I'm going to start with the mid-year recap, followed by an update on the fundamentals and how our business is nicely positioned for the energy transition. Con will take you through the numbers, and this time around, our progress on sustainability. This next slide is our 2021 priorities dashboard. Our core businesses perform very well, high utilization across liquids, gas transmission, and the gas utility. That drove strong first and now second quarter numbers, so we're confirming full-year EBITDA and DCF guidance as you saw in our release. The $17 billion capital program is on track with $10 billion scheduled for in-service this year, and that'll drive our three-year 5% to 7% DCF per share CAGR outlook. Our balance sheet is in great shape. In fact, Moody's upgraded us to BAA1. So we're now at that level across our four agencies. And the sale of our minority stake in the Verco provides more buffer and releases great value for a non-strategic asset. While upstream investment remains disciplined, we're seeing a pickup in commercial activity around the US Gulf Coast in particular, system modernization and low carbon opportunities. And we continue to bolster our industry-leading ESG position. MSCI reaffirmed our A ratings, so we're pleased with that. So the message is that we're on track to deliver on the 2021 priorities we laid out at Enbridge Day last November. Moving to slide five, the economic recovery is gaining momentum. Global fuel demand has rebounded, but not fully back to pre-pandemic levels. Transport sectors came back with gasoline, diesel, and jet fuel all up Petchem demand was less affected by the pandemic so the jump is not as pronounced here but still up three percent. We've seen the return of global LNG demand and with that strong pricing. We're still taking a cautious approach to the rebound but it's pretty clear the recovery will drive crude and natural gas demand led by developing countries. And as you've heard us say before, we're big believers that natural gas will be essential no matter what the case of the energy transition. Aside from the many benefits of gas, the fact is that it's also crucial in supporting renewables growth and reducing global emissions. And that's playing out more and more when you look at how gas is being built into long-term energy resource management planning. That's playing out in real time in Ontario with our announced new community expansions for gas and other regions looking to displace coal-fired generation. So the picture highlights the strong runway for conventional energy growth over the next decade. But as we've been saying, we've been evolving our business to align with the changing energy fundamentals. So here's what that looks like for us. Any way you look at it, we're going to play a big role in the energy future. That's simply because our businesses have both conventional and low-carbon growth opportunities, and this chart illustrates how we think about this duality. Demand for capacity on our natural gas and crude systems means more modernization and expansion investments toward export infrastructure in particular. That's because over 80% of conventional demand comes from petrochemicals, industrial, power and heavy duty transportation, which continues to grow globally with limited alternatives at this time. In addition, we expect our low carbon growth opportunities to scale up. We've got a competitive renewables business with a growing European offshore portfolio, and that capability has allowed us to accelerate our solar self-power strategy and lowering emissions. R&G, hydrogen, and CCUS will take time to be a bigger part of the energy mix, but we're investing in these opportunities today across our businesses. In liquids, we're well positioned to support our customers' emissions goals through CCUS, I'm going to come back to this one in a few minutes. The same holds true for gas businesses where we have access to saline aquifers, direct connections to customers, and the utility platform we're investing in hydrogen and RNG today. Importantly, these low-carbon investments will ensure continued utilization of our assets for a long time while lowering the emissions intensity. So that's how we're positioned early for the transition. On to slide 7. In the near term, our 5% to 7% BCF per share growth through 2023 will be driven by what you see here. 1% to 2% from embedded revenue escalators, and of course that provides good inflation protection, low capital intensity optimizations, and productivity improvements, while the rest is driven by secured projects in execution right now. We've also laid out our post-2023 growth drivers and our capital allocation options. Now, Colin's going to go through the framework and priorities, but in summary, we have an attractive organic opportunity set, but we'll be very disciplined and not chase growth where the returns or commercial underpinnings don't fit the value proposition you're used to seeing from us. So we'll evaluate those organic opportunities against other options like share buybacks. Let's shift now to the business updating, starting with liquids. We just completed a 160,000 barrel per day expansion of the woodland system to keep up with curl production. And those volumes, of course, support downstream throughput on the main line. It's a good example of the low cost opportunities we have in liquids. Now in Q2 customers took advantage of the shoulder season for refinery and upgrade or turnarounds resulting in lighter throughput as we forecasted. Volumes are picking up again trending towards our full year forecast of about 2.8 million barrels per day and we've laid out this trajectory in the chart. On mainline contracting the hearing wrapped up last week as you heard Shipper support continues to be strong and noteworthy that some dissenters, even while disputing the negotiated toll, are supportive of contract. Onto line three, we received a positive decision from the Minnesota Court of Appeals, which reaffirmed the PUC permits. Construction-wise, we're tracking the schedule. We're about 80% through mainline construction, slightly higher on stations, so we're moving along well and continue to work on water crossings. All that to say, we're on track for a Q4 in service, and once we get there, Line 3 will contribute nicely to cash flow growth. We're all focused on construction progress, of course, but a couple of things to point out here. The project enhances the safety and reliability of our system. That's good for us, it's good for customers, but it's also positive for the rest of our stakeholders. And second, there's great support from local communities and tribes that continues, and we've invested locally to ensure they benefit from this project. We're very proud of the $250 million plus in spend with tribal businesses, their workers, and communities. lastly on the liquids business how we're thinking about carbon capture using western canada as the reference point given the opportunity to make a big impact on emissions so that's on the next slide first of all there's no doubt that ccus will be critical to meeting society's net zero targets i think little by little that is agreed upon by just about everyone. And it's essential to Canada's emissions goals in particular and the U.S. as well. And it was good to see some of the new infrastructure details come out also being supportive there. The share investment needed is going to be massive. With current technology, it takes roughly $1 billion of capital to reduce a megaton of CO2. We're excited about this opportunity, and our strategy is driven by the fundamentals. And while the technology really isn't that new, we need clarity on policy to scale up and attract capital. So as you know, in the U.S., the 45Q provides a good foundation that's starting to make things happen at an even faster pace. In Canada, incentives are on the way as well, and we're at the table to help shape that outcome. but important to recognize that emitters and our customers will be driving the timing. We're in discussions across industries to explore how we can support them. Our strategy focuses on the full value chain from capture through to storage, which aligns well with our assets, and we believe a utility-like commercial model will be most cost effective. These are complex projects, so our scale, Customer relationships in all of our businesses, execution capability and ESG focus make us a natural partner. And it will be important to work with technology and industry partners as well. As an example, we just entered into a partnership with Svante, which has developed innovative carbon capture technology. We like this because it can be used for a range of industrial applications at much lower capital cost. And that, of course, has attracted a lot of attention from the upstream community. We're going to keep you posted on how we're progressing on the strategy. Moving to the next slide and gas transmission, where we're slated to bring in 3 billion plus of projects into service this year. Construction on T South and Spruce Ridge in BC is progressing well, and we've put the initial phases in service in Q2. On T South, two of the five stations and the initial segment of Spruce Ridge are operating. Both of these projects are cost of service, commercial underpinning, which ensures a solid return on $1.5 billion of capital. Great progress on our U.S. Gulf Coast LNG strategy with construction of the Cameron Extension Project, which will supply about $800 million a day to the Calcasieu Pass liquefaction plant. And there we're on track for Q4 in service, and that's a $200 million project as a reminder. And these projects fit right in the middle of our low-risk fairway. The same is true for our modernization program, and that's on slide 12. The criticality, as I mentioned, of natural gas to the future energy mix is going to drive investments for many years to come. Part of that will be compression. which also helps reduce emissions. And as it says here, it's about a 25% per compressor reduction in emissions as we move along. And we're working with industry partners now on how we can add carbon capture. We think modernization capital will be roughly half a billion to a billion annually for which we'll earn a solid return. And related to that, we'll be initiating a Section 4 rate filing on Texas Eastern shortly. We've also received FERC approval on our Alliance and MN&E settlements, and we should hear back on East Tennessee soon. So things are moving along on the regulatory front well on gas. Development activity, as I mentioned early, is also picking up, and our new Ridgeline project is a good example. We're pleased to be working with the Tennessee Valley Authority, that's TVA, on an opportunity that could provide affordable, cleaner energy to the utility's customers. Ridgeline would expand our East Tennessee system, which would be about a billion dollars, assuming the combined cycle option is selected through the TVA's review process. It's a great example of how natural gas can preserve reliable and affordable energy while lowering emissions by replacing coal-fired generation. Pending TVA's environmental assessment and supply source determination, project approval and the necessary permits we're projecting be complete by 2026, and that'll support our medium-term outlook. On to the next slide in gas distribution. The utility just continues to grow and deliver solid results. We're on track to add another 45,000 customers this year, And we're very excited to be moving forward with our community expansion program, comprised of 27 new connections, including remote Indigenous communities. Along with system modernization and reinforcement projects, we see investing $1 to $1.5 billion annually in this business. And our incentive regulatory framework, while generating a good return, also ensures that the investments get captured in rate-based. An evolving and substantial long-term opportunity is lower carbon emissions solutions. On to slide 15, our utility has been a fantastic way to develop innovative lower carbon RNG and hydrogen that will green the gas grid by leveraging our assets. On RNG, our Dufferin project went into service this month. That makes three projects in operation. There's another three in construction. with 10 to 15 in the hopper, including through our partnership with Comcor and Walker Industries. Perhaps a larger opportunity is leveraging our assets for hydrogen. Our initial pilots are proving out the technology and scaling hydrogen across the system. At our Markham Ontario facility, we validated the green power to gas phase, so that's good to see, and we're now constructing phase two to inject hydrogen into a closed-loop system in the utility. The blending facility is about three-quarters done and on track to be in service later this year, so we're looking forward to that. In Quebec, we're planning to blend up to 5% into our Gazet Fair utility, and that project is currently in design and engineering. So you can see we've got a great utility platform to develop low-carbon opportunities within a low-risk business model. Now onto slide 16 in our renewables business. First, good progress on the three French offshore wind projects. On St. Nazaire, 13 of the 80 foundations are done, and turbines are being manufactured for FECOM and Calvados. These three projects are scheduled for in-service in late 2022 through 2024, the first being St. Nazaire, so solid cash flow growth to come over this period. Our MEPO power development team continues to build the pipeline. We've got two projects with potential for over 600 megawatts in France that have secured leases. Dunkirk Near Shore and Provence Grand Large, which is a floater project, pilot, obviously further offshore. And we're starting community consultations on the Rampian Extension project in the UK, and that's up to a 1.2 gigawatt project. So you can see here there's a lot going on in this business, but in the bigger picture, the frothiness we're seeing in renewable space has made our assets more valuable. We've got an inventory of projects we started developing a while ago before things got overheated so we can grow without getting involved in highly competitive situations on to slide 17 and an update on solar self powers there's lots happening here as well we now have three projects in service two in our gas system and one in liquids we sanctioned another four liquid stations recently which will add 40 megawatts so it's beginning to be a meaningful part of our renewable strategy What's exciting is the broader opportunity across our LP and GTM businesses. And you can see the dots here show the location of pump stations on liquid system and compression on natural gas. We see the potential to deploy up to half a billion over the next few years with more after that. Of course, these investments will need to clear our hurdle rates and they also reduce scope two emissions. You can see here on the chart the opportunity for emissions reductions over the years. So with that, I'm going to turn it over to Colin. All right, thanks, Al, and good morning, everyone. I'll start with a quick overview of our $17 billion capital program. As you know, it's a big growth driver for us, but not our only one. We're making great progress on our program across the footprint, and we're on track, as Al said, to deliver 10 billion of projects into service this year. This well-diversified growth portfolio should generate a significant step up in cash flows, really a conveyor belt, if you like, of additional cash flows for many years. And in turn, considerable financial flexibility and investment capacity, which is clear on slide 19. In addition to our secured growth execution, we've actively recycled capital at attractive valuations over the last few years, high-grading the portfolio and further strengthening our financial position. Our recently announced sale of our interest in Niverco at 29 times earnings multiple is a great example of this. When that transaction closes, we'll have completed over $9 billion of asset sales since 2018, all while growing total cash flows. And as you know, deleveraging while growing is not exactly an easy feat. Today, our balance sheet is right where we want it to be, and across the board, our agencies recognize this strength currently, even now prior to executing on our 21 capital program. We've been BBB plus rated with three agencies for a while now, and the upgrade from Moody's last month makes four for four. And as I mentioned, our execution will lead to even stronger metrics in 2022 towards the bottom of our target range or even below. Our preference then will be to live near the lower end of that target range to preserve a maximum optionality. On to slide 20 and a quick overview of our capital allocation priorities. We've said this before, but it bears re-emphasizing because it illustrates capital discipline. Our priorities are unchanged. Financial strength, responsible dividend growth, and $3 to $4 billion per year of rateable utility-like assets in-court or reinvestment represent our core game plan, if you like. That will leave us with about $2 billion of additional annual capacity, which will deploy against the next best alternatives. So as Al alluded to a couple of times, conventional growth will need to compete with share buybacks, which remain attractive also. Now I'll walk through our quarterly financial results on slide 21. Adjusted EBITDA was $3.3 billion, while DCF was $1.24 per share, and earnings were $0.67 per share. I won't review all the details that are in our news release in 10Q, but if I step back, there are a few key observations. First, each of our platforms is humming along nicely. Q2 last year was, of course, the trough for energy demand, and it's clear that the economic recovery is now in full swing. Second, foreign currency translation continues to provide a slight headwind. As you know, our assets are geographically diversified with about two-thirds of our businesses earning U.S. dollar denominated income, which we substantially hedge. The translation of our U.S. operating results in each segment were negatively impacted by the weaker U.S. dollar which is partially offset by our hedging gains reported below in eliminations and other segment. Third, energy services continues to be challenged by underutilization of some of our fixed contract commitments due to a confluence of unusual market conditions, including weak basis, limited blending opportunities, and market backwardation structurally, so little value in storage these days. In contrast, you'll recall last year we benefited from significant contango conditions and related storage gains due to the pandemic. As a reminder, these relate to unused demand charges. They are not speculative trading losses. Finally, in DCF, We're benefiting from favorable interest rates and translation of U.S. interest expense, and we're expecting cash tax savings stemming from increased utilization of existing tax pools to offset proportionally larger U.S. dollar taxable income. So overall, another good quarter in the books, so let's move now to the outlook for the second half of the year on slide 22. Starting with EBITDA operating performance, for the first half of the year was a little better than planned, but that's been partially offset by weaker U.S. dollars I mentioned and negative contributions to energy services also. Overall, we expect first-half trends to continue through the second half of the year, including strong utilization of our systems, so we're confident that we'll perform within our guidance range for EBITDA. A few more comments on EBITDA. As I mentioned, our U.S. dollar exposure is substantially hedged, which materially protects us from a weaker dollar. Secondly, a comment on inflation. It's potentially trending up, but again, we're well protected here, with about 80% of our revenues having either built-in inflators contractually or periodic regulatory protections through rate proceedings. From a quarterly standpoint, EBITDA profiling perspective, a reminder that seasonally Q3 is our lowest quarterly contributor, of course, with lower heating days in the summer months affecting our utility, lower wind resources and renewables, and some seasonal effects in our liquids system, partly related to maintenance. I should also mention that Texas Eastern service is fully resumed now and sooner than expected previously. course q4 profile wise tends to be a larger contributor with winter heating season driving good results in our gas businesses and line three is on track to be in service which should contribute nicely to cash flows per our original guidance turning to dcf our second half results will of course align with ebitda but should also benefit from continued favorable interest expense lower rates, favorable USD translation, and lower financing requirements than were originally expected due to the anticipated proceeds from the Niverco transaction close. Finally, at this point, we do expect that cash tax savings for the full year will be around $100 million relative to our original guidance for the year. On to slide 23 with a quick word on sustainability. We've integrated sustainable practices into our business for a long time. Each of the E, S, and G are absolutely essential to how we have been running our business and engaging with our customers and communities in which we operate. In June, we issued our 20th Annual Sustainability Report, which reflects this longstanding commitment. The report highlights our good progress towards our emission reduction targets, We've reduced scope one emissions by 32% and scope two emissions by 14% since 2018. And we have line of sight to execution pathways needed to meet our 2030 intensity goal and our 2050 net zero goal. On the S, community and stakeholder engagement is integral to both project execution and, of course, operations thereafter. A few numbers. We've spent over a billion dollars with Indigenous groups since 2017, including direct spend and subcontracting opportunities with Indigenous businesses. And in 2020, in one year, we contributed $3 billion of property taxes and income taxes to various levels of government. Our continental workforce is diverse already, and we're striving to enhance all elements of diversity, including at the board level, to achieve our 2025 target. On the G, our board is highly engaged with the diversity of backgrounds, experience, and thought, and importantly, our ESG priorities are tied to enterprise-wide management compensation, ensuring alignment to our performance. Our objective is to be a leader, and the ESG rating agencies recognize this across the board. We continue to innovate in this regard, and in this quarter, that mindset is reflected in our issuance of our first sustainability-linked bond. A few comments on it. We're proud to be a leader in sustainability-linked financing. Our published framework guides our thinking in this regard, and in that framework, we've selected KPIs that align with our goals and we think are critical to our long-term success. Of course, we followed up the framework with a billion-dollar sustainability-linked bond in June, which combined with our billion-dollar credit facility, also StabilityLinked, earlier this year, that now ties already $2 billion in financings to our ESG performance. We think this capital formation trend will dovetail well with how we conduct business. In particular, we see both pricing and, moreover, access benefits for sustainable financing. For example, approximately 40% of our SLB order book were ESG-type mandate investors, adding further demand to our already diverse investor following. Before I turn things back to Al to wrap up, I'm excited to introduce and invite you to attend two events. On September 28th, we'll be hosting our inaugural ESG Forum in New York. At that event, you'll hear from a diverse group of our leaders about how we've embedded leading ESG practices within our business. and we'll continue to hold our annual Investor Day on December 7th. This year it will be in Toronto. This is always a great opportunity for us to share our business and corporate plans, and we look forward to connecting with many of you in person. It's been a while. Thank you, and back to you all. Okay, thanks, Colin. Just before we open it up, just a few takeaways. I think 2021 is, it should be clear from that run through, a pivotal year to delivering on the three-year outlook that we outlined at Enbridge Day last year. And we're progressing well. The businesses are running at high utilization and financial performance, as you just heard, is strong. Execution of the program is tracking the plan with that $10 billion that Colin just referred to. The pace of the economic recovery gives us confidence around demand for conventional energy over the medium term. And importantly, our assets are essential to the energy transition. As you heard, we're making good progress on our low carbon investment strategy in a number of areas. And finally, our leading position on ESG is getting stronger yet and good progress on our goals there. So we'll begin the Q&A session now. The team is on the line here. I'll hand off as required on specific issues.