Q3 2020 Enbridge Inc Earnings Call
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Welcome to the Enbridge Inc.'s 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 [noise].
During the question and answer session. If you have a question. Please press star one 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.
Good morning, and welcome to the emerging third quarter 2020 earnings call.
Joining me. This morning are al Monaco, President and Chief Executive Officer, Colin grinding Executive Vice President and Chief Financial Officer, Vern, you Executive Vice President liquids pipelines.
Bill Yardley executive Vice President of cast transmission and midstream Cynthia handsome 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 web web site. Shortly after we are going to try to keep the call to roughly one hour, but will allow for additional time if necessary in.
In order to answer as many questions as possible during the Q and Hey, 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 will be happy to respond.
Onto slide to where I'll remind you that we'll be referring to forward looking information on todays call by its nature. This information contains forecast assumptions and expectations about future outcomes, which are subject to risks and uncertainties outlined here and discussed more fully in our public disclosure filings, we'll also be referring to non-GAAP measures summarize below.
With that I'll hand, it over to Al Monaco.
Thanks, Jonathan and good morning.
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.
I'll provide a brief business update today, then Collin will take you through the financial review and given the interest and capital allocation he'll talk about our framework and our current thinking.
Ill come back at the end and outline the DSG targets, we announced earlier and.
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 are 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 cost by 300 million. This year and we're now projecting $400 million for next.
Onto 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.
An increase in middle class and urbanization.
Developing countries by themselves will need at least 35% more energy and.
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 Thats always been the case over history and won't change.
And third no matter, what future demand looks like what kind of energy, we're talking about we need existing infrastructure replacements and new bills.
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.
But it is 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 IEI forecast shows energy demand growing and a slightly shifting supply mix.
Now you have all seen a number of new forecast come out lately and we've shown the range of those here you can see theres 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 clip from a low base.
The point of this is that we're going to need all sources of supply and 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 show and it assumes all announced policies to lower emissions are implemented as scheduled energy.
The efficiency improves 2% annually, we spend 35 trillion on new infrastructure roughly double.
And 150, Gigawatts a year solar capacity added versus 85 per year today easy adoption climbs to 15% of the fleet or 300 million vehicles versus 1% today now everybody's motivated to see this happen.
But it's not going to be a cake walk by any means and without these actions.
Consumption of energy is very likely to be higher and the mix changed a lot slower.
Now more radical change in consumption is possible, but not by 2040 in our view for example, we need more aggressive and globally synchronize policy and significant carbon prices.
Doubling of efficiency approaching the limits, a 4% increase solar capacity adds by another 65, gigawatts annually and tripling of the fleet to 45% by 2040.
So the next slide gets to why we believe will need conventional energy for a very long time to come.
Oil demand continues to rise and stabilizes and thats driven by accelerating growth in developing countries, increasing pet Chem demand I think everyone understands the reasons for that and oil retains a large share of the transport Mark.
We are 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 as excellent load following capability store ability lower emissions and it's crucial to renewables intermittency.
We expect roughly 40 tcf per year of new industrial and power Gen demand.
And our LNG.
Are going to be real and will 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 thats 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 kobin.
We hear a lot about terminal value risks today. So let me illustrate why we are confident in the longevity, our cash flow 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 thats, a good upside for us post coated.
The other dots here show how crucial our gas system is to replacing coal, but also in meeting future us northeast offshore renewable power balancing requirements.
The business has long term contracts cost of service and regulatory protection revenues are mostly 100% reservation based contracts are serially renewed for term year. After year. In fact, bill just concluded the renewal process at 99% for Tetco and Algonquin So clear.
Our customers believe and longevity of our gas system and types generally.
On 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 of 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 85000 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 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 mainline.
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 are configured to run heavy crudes that maximize margins and returns.
Refineries, we serve in the Gulf in the Midwest and 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.
Heavy is going to be in shorter supply as Mexico, and the rest of the world decline.
The only sources of heavy growth or the middle East and Canada stock.
That's why Canadian barrels with big growth potential and proximity to us markets are ideally position.
So these two realities that you see here not only support the existing mainline cash flows or 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 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 96, we had a strong view on the future of gas. So we acquired what is now enbridge consumer.
Gas utility.
Four years ago, we acquired spectrum, 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 there 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 RMG in hydrogen which is why we're ahead of the curve on those two.
The pie is then that the bottom here illustrates the gradual approach to diversification that has aligned us well with a global supplements.
And during all of this we optimized our business by driving out cost selling assets that didnt 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, our North American offshore Europe Weve.
We've built development construction and operating capability and renewables is now the fourth Enbridge platform.
Today, we have 1800 megawatts of capacity net to us so thats 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 threshold. In fact, we recently turned away a couple of opportunities that didnt 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.
RMG represents an opportunity to grow gas volumes and leverage our own utility and GTM franchises, we have six RMG projects operating and in construction. These are and the upgrading and injection and of the RMG value chain and more plant.
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 it's 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 piloted north America's first power to gas facility, which uses and electrolyzer to convert watered hydrogen.
The plant is contracted to provide grid stability for the ISO to capture off peak renewable power.
In fact, we just received approval for phase two 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 as 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 call in just a brief business review starting with liquids rich.
Recall, we're cautious on volumes fully returning from coded and it turns out that we were right with that forecast.
Our Q3 mainline throughput we ended up at we were forecast at the point, where we're forecasting it to 4.55 million barrels a day and that reflected the upstream outages at Suncor is base plant and Carol So that was a good outcome actually.
We also returned to heavy apportionment and Weve 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 in the Midwest, We will see those come back for.
For Q4, we see heavy capacity fully utilized so we should be tracking to the Q4 range of 2.55 to 2.75 that.
That we forecast last time and that accounts for second wave impacts and you see the Q1 range here a 2.65 to 2.75 next year.
Now one thing Vern and his team have been working on is filling up some of that like capacity in the interim with medium blend. So thats a good outcome when that happens.
Lastly, liquid started construction of its first self power solar Gen facility in southern Alberta, and we're looking to apply this to a broader scale.
Online three were 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 PPA contested case finished.
With a positive algae decision that's important because it clears the way for the PC a for a one permit decision by next week statutory deadline and the Army Corps Forum for after that.
The DNR and the core 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 East bound capacity has now been restored and southbound should be back shortly.
Rate proceedings are underway on the alliance East, Tennessee, and Maritime it's been a busy year on the 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 Lambrecht field, New Jersey, and a second is scheduled for next year.
On gas utility to slide 18.
They put up good numbers and continued to deliver growth I think Cynthia and her team have done a great job on synergy capture from merging the two utilities.
Last year, we added 40000 customers and more to come by extending the franchise to new communities.
Recently asked Aidid, 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 Ontarios largest landfill all our LNG facility in AG or falls by the way. The regulator just recently approved a program for customers to choose our energy supply and Thats 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 to those sentences on fee comp are in construction and on schedule for in service in 22 and 23.
Just looking at the in the cell phone or you see here you get a feel of the scale of these projects and the equipment, which is partly the reason why off for renewables are competitive today.
We've got experienced partners in this business and our joint venture with Mccain and pension plan helps us optimize capital and returns so now over to Colin.
Thanks, Al and good morning, everyone I'll start on slide 20, with our enterprise quarterly highlights.
Overall, I think a pretty balanced quarter on various dimensions operationally, we saw solid utilization across all four of our businesses.
Al spoke to cost savings. They are on track. This all translates to one dollar three DCF per share and about $3 billion in EBITDA during the quarter.
It's outmoded will also.
Advanced several strategic priorities construction is moving along well on our $11 billion secured growth program online three North Dakota is now complete and in Minnesota, We are starting to receive initial permit.
The state for a one water quality permit is anticipated shortly.
Let's move to slide 21 for the financial review.
Nine month results for EBITDA and DCF are roughly in line with last year for the same period, despite the pandemic and other challenges.
And similar to Q1, and Q2 Q3 is a little bit stronger than we planned.
Adjusted earnings are lower than the prior year, the largely owing to a full year of our full charge of the depreciation expense on line three Canada as you recall put into service in December.
While we are earning only a modest interim surcharge.
This disproportional expense to revenue relationship will improve markedly when line three you asked is completed.
Adjusted EBITDA is about on track to except for the accounting treatment related to make up provisions on certain contracted assets for volumes and on shift.
On these assets, we received contracted cash payment.
That we recognize in DCF, but for revenue recognition purposes do not get included in earnings or EBITDA in the third quarter. For example, this impact was approximately $120 million and would have led to EBITDA of 3.1 billion otherwise.
I'll now walk you through our segments on slide 22.
Liquids pipeline segment EBITDA was down year over year 94 million, mostly due to the decrease in mainline volumes year over year, which al already covered.
Specifically, we transported about 160000 barrels per day.
Fewer.
In Q3 last year.
Which translates to approximately a $50 million impact.
Offsetting some of this impact is a higher mainline toll, including a 20 cents surcharge collected on the line three Canada segment.
EBITDA in the regional oil Sands system was about $20 million lower this quarter due to disruptions upstream from the Suncor plant fire and separately.
Disruption to the basin.
Lehman supply.
As I mentioned the majority is assets, though are underpinned by take or pay arrangements and we collect harris for any new space.
Further downstream are well contracted Gulf coast, and mid Con systems generate reliable based cash flows to but lower light spot volumes out of the Bakken and on the Seaway legacy system drag results a little.
In contrast, the addition of Grail with its strong contractual underpinnings and the phase one express expansion of 25000 barrels per day placement service earlier. This year helped again this quarter.
Yes transmission EBITDA was flat year over year, despite the sale of our Canadian gathering and processing assets at the end of last year and the Ozark assets earlier, this year, which combined contributed about 25 million historically.
Our gas transmission assets benefited this year from the rate settlements, we announced earlier this year on Texas, Eastern Algonquin and the BC pipeline system.
Our three big gas systems. These.
These three settlements combined are expected to provide an incremental 160 million of EBITDA on an annual run rate basis, and we recognize a slightly greater quarterly pro rata share of that this quarter.
Gas transmission also is benefiting from the realization of ongoing cost savings initiatives.
This was offset during the quarter somewhat by the headwind of capacity restrictions related to our integrity program, which is about $50 million of EBITDA during the quarter.
This program was substantially completed in October.
As a reminder, this business is very utility like with nearly all of our cash flows coming from reservation based contracts many computed through a cost of service regulatory method.
Gas distribution and storage EBITDA was up 60 million compared to last year, reflecting customer growth and increase in distribution rates and continued synergies capture from the combination of the two utilities.
This business continues to generate quiet and ratable growth and as again performing well during a challenging operating pandemic environment.
Our power business was up also from last year 11 million. This was primarily driven by the contribution from the two German offshore wind farms recently put into service.
Our north American onshore wind and solar assets continued to perform well and in line with expectations also largely unaffected by pandemic effects.
In contrast energy services experienced a loss of just over 100 million during the quarter. This is a pretty unusual result, and reflects the significant impact of covance demand on narrow regional basis differentials and corresponding lighter volume movements.
Said simply this business didnt cover fixed demand charges on its laddered portfolio of pipeline and storage contracts.
On our systems and others use to generate margin.
To be very clear, we do not take speculative positions on commodity prices.
Looking ahead at forward basis differentials, we see challenging market conditions for this business continuing to the fourth quarter, although better than the third quarter and recovering in 2021.
Finally, eliminations and other was 48 million favorable to last year, the majority of business from lower costs.
And I should mention that are enabled 300 million of cost savings are expected, our our reported proportionately in each business segment and also some in maintenance capital too.
Moving to slide 23 for our DCF reconciliation distributions received from our joint venture investments have increased from last year, primarily due to new assets placed into service.
Maintenance capital financing costs income taxes and distributions to non controlling interests are all collectively I would say trending in line with expectations for the year.
Lastly, as mentioned earlier DCF benefit from the normal course add back of $120 million of cash received on unused contracts.
So overall, we had another solid quarter.
On to slide 24, we have three strong quarters in the bank and as I mentioned were well ahead of budget for the nine months and that sets us up well for the full year.
As we look to the fourth quarter were anticipating though a few headwinds that will temper. This growth first volumes on the mainline are recovering in line with our expectations.
So we still anticipate volumes were down 100 to 300000 barrels per day relative to what was factored into our original guidance.
Second although it's a small part of our business. We are anticipating energy services will need to be a little bit weaker in Q4 as I just mentioned.
In gas transmission, we expected Q4.
To be impacted by some catch up spending and the ongoing reduction in distributions from DCP.
Favourably, though is we expect continued strength and financing costs and cash taxes.
So combined these headwinds and Tailwinds give us confidence that we'll be well within the DCF per share guidance range for 2020 in the middle of the range.
Ultimately EBITDA will be likely a little bit lower than our 13.7 billion.
Point estimate target of guidance due to the makeup rights contract treatment I mentioned, but this will be offset in DCF.
As we look out to 2021, we expect steady continued EBITDA growth this should be driven by the following factors.
Continue it continued recovery of mainline light crude volumes.
Annualized contributions of positive GTM rate settlements.
Continued customer growth and synergy capture in the utility.
Cost reductions will sustain into 21 and grow as al mentioned.
And we expect some new assets to come into service on the BC pipeline in late 2021.
As well there is the potential for contributions from line three.
The primary headwinds.
Our likely a weaker us dollar used to translate our performance and potentially a smaller headwind.
And energy services.
Of course, we intend to provide a more fulsome 2021 guidance package on December Eightth.
On to slide 25.
We continue to remain focused on preserving our financial strength.
Our credit rating for things to be among the best in the industry.
DBRS and Moody's both reaffirmed their ratings not look during the third quarter.
We expect full year leverage to be well within our target range of 4.5 to under five times.
Debt to EBITDA, which range itself is well within triple B plus territory.
Our counterparty credit performance has also been strong despite current market conditions.
In addition, our 2020 funding plan is complete and we Prefunded a portion of 2021.
The final topic I'd like to discuss capital allocation on slide 26, it's obviously topical.
Starting on the left side, along with our base business. The secured capital projects were executing on are going to generate a tremendous amount of free cash flow once fully in service.
And combined with the debt capacity generated by that EBITDA, we anticipate five to 6 billion of annual financial capacity to reinvest.
Now over time, we've maintained a very disciplined organic and risk adjusted returns based approach has created a lot of value for sure for shareholders and we aren't going to deviate from that recipe or our low risk business model.
Our first capital allocation priority of course is to preserve our financial strength, we've worked our leverage levels down through good execution simplification and non core asset sales and we'll maintain this robust position.
Second we will continue to prioritize sustainably returning capital to share shareholders through dividends.
Our dividend is central to our investor proposition and we intend to grow the dividend annually and we've always targeted the midpoint of our 60% to 70% payout range overtime.
Thirdly, we will continue to grow cash flows organically, but in a word will continue high grading our focus on projects that deliver the best risk adjusted returns with high confidence.
I'd remind you of our capital program optimization early this year in May for an example of that.
It's pretty clear that our 2021 priority is completing our secured growth program, which will generate over $2 billion of incremental cash flows.
So you can see the marginal economics on that completion capital is powerful and compelling.
For new capital deployment will prioritize regulated rate base additions in our gas transmission and utility businesses, which are uniquely positioned to do so.
In addition, we'll place continued emphasis across our business on an efficient growth opportunities that generate outsized returns with limited capital.
A good example of this is our liquids mainline capacity optimizations over the last few years.
These in franchise in corridor smaller executable projects come with a much shorter payback period, which is great.
And of course cash flows will be further enhanced by Eric our embedded growth cost reductions total escalators and the like and of course those required zero capital.
So of our $5 billion to $6 billion of annual financial capacity. This initial high graded allocation of capital will ratably use up.
Separately about two thirds or $3 billion to $4 billion.
Which is going to leave us about.
About $2 billion to $3 billion of capacity to consider other capital deployment options.
In terms of how we use that capacity.
Clearly at share prices, we see today share repurchases have moved up the preference order and our pipeline of more traditional longer payback organic growth opportunities across all four of our businesses will need to compete with that.
We have also on the slide listed various relevant qualitative considerations here too.
Of course, we'll continue to assess smaller investments in new energy technology infrastructure as al mentioned like we've been doing to create optionality and sustain our competitive edge I.
Thinking about hydrogen RMG CNG in a like here.
And finally, as we've been saying large scale M&A is a low priority simply put we see the execution of our base plan as.
As a superior value add strategy, and we don't want to compromise our business model.
The bottom line is that as shareholders ourselves, we remain hyper focused on disciplined allocation of shareholder capital.
Okay, I'll wrap up with SG cone gathering today, we're a clear leader I think thats apparent from the proof points here and the third party ratings and the reason for that is that ESG has been part of how we've operated this business for a very long time. This isn't very first rodeo at DSG leaf.
Set and met targets in the past and the way we look at SSG is really as an enabler of our operations and our ability to execute strategy. So not a nice to have but a must do and we believe this is a differentiator the new targets are about getting even better we spent.
About a year or thinking about that and devising a plan to achieve those targets.
So on the next slide on the E. We're setting an interim emissions intensity reduction target of 35% by 2030 and net zero by 2050, those cover scope, one and two emissions from our business.
And although the midstream business today overall in our industry accounts for about 2% of the energy value chain, we're going to be tracking performance against scope three as well to reflect our investments and low carbon infrastructure that we mentioned.
On the EPS were increasing our diversity goals, including 40% gender representation, 20% ethnic and racial groups and that extends to the g. for the board level.
40% on gender and 20% on ethnic and racial.
And to ensure we have good alignment we're linking these to executive compensation.
The next slide briefly captures our four pathways.
First modernizing equipment and applying technology to tackle emissions and reduce consumption using lower carbon sources of fuel for our pumps and compressors.
Self powering were solar on both liquids and gas as.
As you saw earlier in the examples and we'll continue to invest in nature based offsets.
Just a couple of observations about these pathways. Each of these are already underway. So we're confident on achieving the targets and of course this.
This won't take a lot of capital investment just given the nature of those pathways, but any time, we do make an investment it will be subject to the usual investment criteria, we have for any opportunity as Colin mentioned in his list.
And I think we've developed a pretty good internal framework here for optimizing the mix amongst those choices. So.
So lastly, let me remind everybody by Enbridge day. The team is excited about it and we think you'll find it interesting.
I will talk about strategy and major seems that we touched on today than our business leaders are teed up to speak to the big issues, they're tackling.
And this time around we are going to showcase our new technology labs that we established last year. Those are essentially incubation hubs for how we optimize the business by using technology and we'll also talk a little bit about a new entry into floating offshore wind in the future fine.
Finally of course, we'll talk about 2021 outlook and then beyond so that will turn it to the operator for acuity.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your Touchtone phone, if you wish to be removed from the queue. Please press the pound key wanted to ask if you are using a speakerphone you may need to pick up the handset first before pressing the numbers once again, if you have.
As a question. Please press Star then one on you touched on some.
Our first question comes from the line of Rob help with Sidoti. Your line is open. Please go ahead.
Good morning, everyone.
Morning.
I appreciate all the color on the capital allocation framework, what to hone in on the potential for or for M&A here, we've seen some of the super majors looking to kind of redeploying into other areas of the business. So we've seen some utilities look to potentially spin out some assets there as well when you take a look at what our.
Assets you want to pick up can you kind of just outlined the framework of what you are looking for are you looking to kind of increased ownership of existing assets are you looking for continuous assets or are you looking for new platforms.
Okay. Thanks, Rob So I think if you're if you're looking at the incremental dollar of investment beyond what Colin just went through there.
As he outlined pretty clearly corporate M&A is unlikely to be at the top of our list and there's a number of very good reasons for that which we can get into if you like but in terms of specific assets.
Certainly ones, where we can build out our core position or protect our core position would be would be great. I would say from a business line point of view the marginal opportunity would probably go to gas transmission at this point in the cycle given the opportunity set we see there obviously.
Sleeve the normal investment criteria, Rob would would apply here it's.
It's it's obviously accretion near term is a factor, but what we look for really is growth accretion. So if something can be added to the current mix that will give us a new platform to grow from then Thats, obviously, something that we would favor and work into into our looks so thats at a high level how.
We look at the type of asset and the business line.
In at least as far as asset acquisitions.
Thank you ill hop back in the queue.
So.
Thank you and our next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open. Please go ahead.
Hi, Good morning wanted to build off I guess, the last one there as far as using a capital to purchase stuff, but I can't see anything better to purchase than in B shares out there. So I see how share repurchases moved up the queue, there, but just kind of a question in you know.
9% yield right now.
Traditionally you look to grow.
Grow the dividend and show that stability, but is there real value in at this point. It just seems like it's trading at such historically depressed levels wondering why not move buybacks, even higher up in the priority list, they're in really kind of pivot capital there to knock down the share count well.
While its of cheap.
Yes, well I'll start it off and then we get called comment as well first of all this valuation that we're seeing is not lost on us at all we're all heavily invested here so.
We are aligned with the shareholders on on what you just outlined and I think you're right. It's it's certainly weigh up the way up the order I think for us.
Jeremy This is really a matter of.
Timing and I think it's really important that as Colin mentioned.
For the next year, we're focused on executing the capital program and Thats simply because we got a ton of cash flow coming out from that in the end the incremental economics or this of this or just so compelling. So I think for for 2021 were pretty much set I think as as again we.
Outline a lot of free cash flow coming at us after that and I think Colin was pretty clear basically.
The traditional longer term payback organic projects are going to have to compete just as they always have with buybacks and certainly at this price.
That's going to be a tougher threshold for them to beat.
So that's that's how we'd look at it I think post 2021, I think it's going to be a race if you will between.
Buybacks and our traditional alternatives, but certainly buybacks has moved up.
Got it I'll stop there. Thank you.
Okay.
Thank you and our next question comes from the line of Robert Kwan with RBC capital markets. Your line is open. Please go ahead.
Good morning.
It's all on capital allocation optimization, and just as it relates to returning capital to shareholders in dividends and buybacks I guess, specifically is it fair to conclude that despite the 8% to 9% dividend yield that you remain committed to.
Dividend and growing that dividend and then for share buybacks would you consider taking advantage of private market valuations to monetize assets on a larger scale basis to buyback stock does that would also benefit your asset mix transitions.
Hey, Robert call. It a couple of questions. There you snuck ends but.
I'll take them in order so.
On the dividend so that.
Yep.
We we understand this and tragedy of a dividend to our investor propositions import stores or so.
We intend to annual increase the dividend, including after.
For 2021.
And we think of that as kind of the base means of returning capital to shareholders.
Uh huh.
In terms of share buybacks, you could think of that as a supplemental method has and I think I will set up the timing on that pretty clearly.
With respect to your second question on recycling capital I think the answer to that is yes, I think we've.
Demonstrated.
In acuity and willingness to do that and we'll we'll keep looking at that so.
So.
Yes, we're going to be pretty.
I think nimble and look at all alternatives to recycle capital and is it the best way.
So much.
Okay.
Thank you and our next question comes from the line of Robert Catellier with.
See ITC capital markets. Your line is open. Please go ahead.
Hi, good morning, I would like to further the conversation.
You addressed all what's your comments on hydrogen and energy transition. So how do you see the roles of impacts on 100 into long haul gas transmission then versus gas distribution assets.
So it's one of those asset classes is better positioned.
Core growth or more rose from the other.
[laughter] well actually is a good opportunity for Cynthia and built a battle it out so I'm going to let them as answer this question, but maybe just a quick comment from me first.
The way I look at it.
We are in an excellent position here if you think about both of those systems very large platforms.
Massive long haul pipelines.
And the same really holds for the gas utility business. The gas utility of course is let's call. It very close to the customer base here, which could help us a lot with respect to deploying.
The the various elements of hydrogen opportunities and the other thing is as since they will tell you I'm sure we're pretty much advanced on on this not just with the.
The technology itself, but how it's actually being applied as I said, we're pretty much ahead of the curve and not to mention good interaction with governments and thats going to be really important I think.
Because it's pretty clear that we're going to need more support and acceleration. So I think they've done a good job on that one and on the GTM side, just a again, a massive footprint to which to apply a future opportunities here. So.
Good, though just to get build and Cynthia's comment Bill why don't you go first.
Sure. So on the on the long haul side, I'd say I'd say two fairly exciting opportunities first as a blending game.
With our current infrastructure and.
That's going to take some time to study we're involved in a couple of different studies as to how that impacts the metallurgy, what the right.
Percentages to blend, but as our points out.
Massive footprint with which to operate and make something work there as the second though is some of the the shorter haul opportunities both with existing type two.
Totally re purpose.
Or new pipe in bringing our.
Our expertise and the siting and construction to that and we're looking to partner with.
A couple of folks early discussions but.
Nice opportunities there that's I think that's how I would sum up transmission at this point.
Thanks, Phil.
I would just add and Cynthia Robert that as Alan mentioned, we are active in this space in the utility space.
Ontario back and we do have our.
How to gas facility and Mark from.
And were looking at.
Blending into.
About 3600 homes, starting early next year.
For some hydrogen Glenn so we've done the research we're at a point, where we're piloting that and so I would say we're looking at those that are.
An opportunity and as Bill mentioned, whether that's going to be blending or it's going to be some new assets.
I think we're well positioned.
Okay. Thanks, everybody.
Hi, Thanks, Rob.
Thank you and our next question comes from the line of Austin, San with Bank of America. Your line is open. Please go ahead. Thanks.
Thanks, Good morning, I just wanted to follow up on your comments on mainline volume recovery good guidance just on light volume.
How do you see the lights evolving in 2021 and did I hear hunt.
100 to 300000 barrels a day lower volume in Q4 does that factor in a second wave and any thoughts on heavy in 2021 relative to Mexico. Thank you.
Okay. It's a vern hair. So overall, we are seeing across North America gasoline demand down, 5% to 10% and diesel demand down about 5% and jet fuel down about 50%, so thats translating into.
Primarily slighter weaker demand on lights.
We do see very strong demand for heavy where we're significantly apportioned. This month and we have been a portion since July. So overall, we're not really full forecasting much increase in light demand until.
Probably early to the middle part of next year, when we see more recovery in the economy post Covance, we do see our volumes going up and really that comes from what al talked about earlier about blending.
Opportunities that we have or we were effectively being able to move heavy crude on our light crude pipelines. So thats the medium blends where we effectively put more diluent into heavy crudes. So we see a little bit have that happening in the fourth quarter and we see that ramping up in Q1.
In Q2 of next year.
Thank you.
Thank you and our next question comes from the line of Linda Ezergailis with TD Securities. Your line is open. Please go ahead.
Thank you I look forward to continuing discussion on all of the energy transition at Investor day, but in the meantime, Im hoping you can help us.
Think about energy services business going forward and recognizing.
Some quarters can be quite strong, including the first quarter of 2018, you need more than $100 million looking.
The.
I guess laddering of your storage and pipeline.
Im wondering what pace those expire on whether you would consider renewing those or maybe adjusting.
Oh, yes, the magnitude of those commitments that you make and.
Im also wondering within that context, if you're seeing any sort of structural changes in the markets in which you operate which might also inform how you read those if you will.
Just to committing to capacity.
Specifically.
With some of the consolidation on the producer side.
Ladies from Oklahoma Kong Paulo, as totaled how that informs your energy service.
Risk management practices.
Hey limited, calling a great question so.
So this is a pretty small business for us.
We like it it's quite effective it and what it does.
The very tightly control.
Business for risk management perspective, and as as as you mentioned, it's it's.
Transport and storage contract base there is no there's no trading.
So.
I think we forecast this business to earn about $100 million in 2020.
[music].
And.
The range on that.
Performance historically as probably being.
Zero to $300 million, it's a pretty tight range is that generally a positive range.
It's a capital light.
Business generally and so we like it.
We have a ladder of contracts here, so they renew and get extended and the team has a pretty.
Thoughtful job of trying to be in the right places.
Using their experience so.
There isn't anything anything structural I'd say long term different here I think the impact that we're experiencing third quarter is is very covance specific and we expect.
The business to return to its.
Historic patterns in 2021 and beyond maybe just a quick add on to that just on the whole philosophy of the business, which I think gets to your question as well.
In a way we we look at the six nature of the commitments as.
Kind of a base level of opportunity that again is like a fixed cost, but then we apply basically one of three strategies. So contango is a big one.
We get value from the basis and of course, there's blending opportunities as well, we're where we make some some good some good returns so it kind of depends on what's happening in the market in any particular year as to how much of the fixed cost recover and generally we've done pretty well on them I think in this environment.
But.
When the basis is getting crushed I think.
We did well on contango earlier in the year, but I think it's one of those things where you've got an interim issue here thats just affecting the profitability but.
Longer term overall, we do pretty well on on recovering and exceeding those fixed costs.
Thank you.
Yes.
Thank you and our next question comes from the line of Tim Sam Let's BMO. Your line is open. Please go ahead.
Okay. Thanks, good morning.
When you look at your your cost back are you Devin yielding you compared to here your all in cost meant that it probably widest it's been for some time you you're benefiting from a cost.
The debt side of things on your.
Your guidance.
So I guess thats the.
Perhaps suggesting equity multiple concern about energy transmission resin maybe to fixed income both at least at this point. The cycle. My question. More is you you speak to your credit rating agencies to fixed income investor is and maybe even your lenders in North America are you finding energy condition.
Conversations pumping up more being at risk and in turn maybe reducing debt and our capital allocation may start to move up in new year. Thank you.
Hey, Ben call, yes, Thanks for that question, it's a good one.
I think.
Everyone's watching energy transition at different views on it.
As Ms measuring it so.
Pace with.
Different views and values.
I think that the debt market you don't.
I mean, you are I think are.
Maria observable.
Yields on our our debt or are pretty transparent.
And you don't really see that risk or concern in the debt market I would say.
But I think everyone's having conversations about it.
We speak with the agencies about this topic.
And they publish on the topic generally.
But I think.
The debt market.
Sees the durability of our cash flows is being quite strong.
In quite quite long so.
It doesn't seem to be appearing in the debt market.
Okay.
Thank you and our next question comes from the line of Patrick Kenny with National Bank Financial Your line is open. Please go ahead.
Yes. Good morning, just wanted to come back to your comment al on corporate M&A being off the table well at the same time, we acknowledged.
Public valuations of hydrocarbon assets or.
Clearly under pressure today, which I presume presents a few by low opportunities for your strong balance sheet, especially.
Especially if we look back.
A couple of years from now and global energy demand does come back strong not through the pandemic.
So just wondering why not look at consolidation within the hydrocarbon infrastructure arena, given we've seen some.
Very big synergy numbers from the NP consolidators.
And I know these opportunities.
Mike may not be accretive per se right now and we definitely go against the grain but.
If you're not looking to monetize your oil and gas infrastructure and make a bigger more meaningful switch into clean energy.
Why not look at executing some generational opportunities to capture financial accretion, then and really drive that payout ratio down to well below your 60% to 70% target.
Yes.
Okay, Patrick Thats, a again excellent question.
Let me put it this way first of all if you as you've seen in the upstream side of things.
Definitely a shift in focus from growth to returns and with that free.
Free cash flow and less capital and a source for the upstream industry.
Is clearly.
Synergy capture which I think is your point and.
We like that idea in fact, if you go back to the spectra transaction.
We more than paid for the low premium deal by capturing a lot of synergy so we get that and I accept the fact that thats a big opportunity we monitor this really closely.
We're pretty happy with the repositioning that we've done already with the spectra deal.
So the focus right now as Colin alluded to is on low capital intensity growth and we've got the balance sheet in shape.
As you said you don't want to mess with that and we're in equity self funding mode. Here. So we're cautious use our currency certainly at this valuation but.
The broader reality as here that few targets. When you go through the entire list really fit us well in the last thing we want to do is mess with the value proposition.
That we've built up around risk and transparency cash flow. So I guess in a nutshell its not just about near term accretion and synergy capture for US. We just don't want to dilute the utility business model that we've had and and in many many cases in the target list, where you've got a valuation advance.
Average today.
Between us and them.
You find there's a big swagger GMP, usually and other sort of commodity sensitive businesses. So I think it kind of comes down to that one I do except that the synergy capture would be attractive, but that's how we look at the broader picture.
Thats great. Thanks Bill.
Yes.
Thank you and our next question comes from the line of Engineering Pesky with Credit Suisse. Your line is open. Please go ahead.
Thanks, Good morning, Al I think you mentioned just the competitiveness of the refineries that you serve especially on the golf.
I don't think you mentioned anything about the longevity of the assets that you serve up in the oil Sands you could just maybe give us.
Framing of how you think about that longevity versus just other hydrocarbon assets.
Hey, all them in North America.
Again ill get drawn into.
To comment and you don't really want to go on today, but I think youve asking a great question and if you think back to the slide that we showed about the heavy.
Refinery.
Our outlook and in particular the reduction in heavy globally.
And where the oil sands plays there.
At the role it will play I think it's just a great opportunity for us and of course as you know.
And this is why I think many people see our mainline contracting opportunity as attractive you've got a a basin. There that this is really brought its cost down and doesn't need a lot of new capital to develop its very much. Unlike.
Tight oil and fracking related.
Investments that happened south of the border. So you got long lived reserves anywhere from 30, 40, 50, 60 years, and I think thats entirely suitable and a good opportunity to marry up that outlook with the great heavy refining capacity in the Midwest in the Gulf. So I think your question.
Spot on in a very good opportunity for us and it goes back to the transparency and longevity of our own cash flows here for many years to come burn you got anything to add on that I think you've covered most of it off out the only other point I would make is that those.
The supply, which has long life is directly tied to our customers through our system, where three quarters of those refineries are sole sourced from the Enbridge system. So we're at the natural conduit between very long life to heavy supply and that.
Most competitive refineries and globally.
Thank you.
Thanks, Andrew.
Thank you and our next question comes from the line of Alexia, Let Wolfe Research. Your line is open. Please go ahead.
Great. Thanks, Good morning I.
I guess just a question on the.
Offshore wind business.
Do you have a sense that maybe you'd want to get more involved than I guess, the ground up development side of things where returns might be a little bit better and now that you've got a little bit more experience and then if I can as well does this kind of thing focus a little more the in Europe.
Give you maybe a little bit kind of better sense of kind of how the hydrogen strategy is evolving over there as well.
Okay.
On the first part I'll take it up on the offshore stress.
Strategy, let's call. It I think you're spot on actually what we're seeing today with late stage projects.
Which.
Frankly, weve used to kind of build up the business.
It's it's very frothy as I said in my remarks, So I think the natural thing for us to do to build out the business from here given we now have great capability on an operating commercial and development is sort of to move up the value chain and so.
Paul at more traditional development model that we use elsewhere in the business on the pipe side. So yes, I would say, that's an opportunity for us and a likely a good way for us frankly to make sure that we're getting the returns we need out of the business of course, you have to develop you have to manage the risk.
More carefully when you're.
Further up the chain, but as I said I think we've got the skills now where we can manage those wells. So I think I think you're you're heading in the right direction on European effects of hydrogen I don't know if since if you want to add.
Comment on that the on the global front.
Sure. Thanks, Phil.
So we are very active with the international kind of hydrogen market. So we do have lots of opportunity to interact true oral hydrogen councils and other activities. So it's something that we're interested in and we've had an opportunity to to monitor and.
Well continue to look for opportunities for us to see how the technology is developing.
Yes, I think the I think thats right. So.
Certainly from where it is in its lifecycle I think us learning as much as we can and that includes Europe is the way to go but.
Say, we have so much right in our backyard here with them.
With with the gas transmission side, and then of course the utility.
We've got a lot of a lot in front of US right now generally Europe's probably a little bit ahead on this but.
I think as I said, we're at we're up the curve as well.
Thanks, very much okay.
Okay.
Thank you and our next question comes from the line of Michael Lapping left that's with Goldman Sachs. Your line is open please.
Hey, guys. Thanks for taking my question.
Just curious and this may be a burn question or someone else on the team we're seeing trans mountain starts to make a little more construction progress and obviously you guys are making some progress in the permitting process for line three just curious about your your macro views up production levels and whether you think production will kind of grow.
Roll into this potential significant amount of new pipeline takeaway capacity and that even not including what would happen if even pay XL came online as well. So just trying to get your views on on kind of the economics of production filling all this new pipeline capacity or is there potential for Canada.
Below the belt like some of the other pipeline takeaway market sorry.
Okay well.
Well I think if you go back to pre pandemic in the first quarter of this year. The basin was obviously significantly pipeline short.
Where we were.
Moving a significant amount of crude by rail and we had a lot of curtailment happen.
On the left hand side of things, so ballpark were five or 600000 barrels a day short capacity.
As we started this year, obviously, our customers have dial back with per week.
Crude prices, but we expect those facilities to come back online as demand grows and we see more pipeline eager asked so our expectation is when line three goes into service that we will fill up immediately we have in our plans that.
TMX will get completed and will also fill up very rapidly as well. So if you look at all of the sources of data for where supply is kind of a goal we still see robust supply growth in western Canada. In fact, if you look at the most recent yeah.
He report it talks about.
Supply growing by 1 million barrels a day between now and 2014 Western Canada.
Got it. Thank you guys I'll I'll stick to the one question requirement and follow up with John offline much appreciated.
Thank you Michael.
Thank you and our next question comes from the line of John criminals with Morningstar. Your line is open. Please go ahead.
Thank you with the positive momentum surrounding Joe Biden potentially becoming the next president of the U.S. do you have any concerns out.
Ill to progress of line three you think with his green deal. He may potentially do we tend to try to stop the replacement. Thank you.
At this point, we have all of our federal permits with the exception of the Army Corps for for permit.
Which as well.
Underway in near the final stages of being issued so once we get the.
Minnesota pollution control agency for one permit our expectation is to get the the Army Corps for for permit.
Relatively quickly.
We should remind you that under the prior administration, where Mr. Biden was vice President we were able to get all of our cross border permits.
Great. Thank.
Thank you.
Yes.
Thank you and our next question comes from the line of Jaime Katz with Wells Fargo. Your line is open. Please go ahead.
Thanks, Thanks for outlining your emissions targets I'm, just wondering from a high level to meet these targets would you need to increase the amount of capex, you're spending on renewables or would you kind of get there naturally based on the current amount you're spending on renewables.
Okay, well good question.
First of all renewables really doesn't come into this picture, although it's certainly part of our strategy. It doesnt so to let's call it offset scope wanting scope to emissions.
We do that by the other elements of the strategy. So as I said modernizing the grid.
Per new.
New compression, where we reduce emissions and.
And in those cases.
Plan has to recover that capital.
As we spend it.
The other elements are very low capital intensity solar cell power is an item, but very small and of course procuring lower emissions power.
From a transitioning grid overall for example, given that coal is coming off that's part of how we're going to achieve the targets. So.
Hopefully that helps bottom line as I said, we don't we don't anticipate capital intense.
Effort here in terms of achieving the targets.
Got it thank you.
Thank you and our next question comes from the line of Jeremy.
JP Morgan Your line is open. Please go ahead.
Right.
Hi, This is Joe on for Jeremy.
Just wanted to build on the cheap side and the different scope admissions.
Could you talk about I think.
The scope three emission reductions that are a bit later, David could you talk about how.
It's only represent two point.
I don't have the energy value chain as a starting point were first of all focused on our own emissions.
You know scope three missions are obviously upstream and downstream of us including at the consumer level. So the way we look at it.
We do and invest in renewables and other.
New technologies, so really those investments are.
Going against if you will the the scope three emission so the way we look at it is those investments served broader societal benefit.
Because obviously scope three R R.
Our missions that occur at the consumer level. So again, we really don't see.
That is a key metric as far as scope, one and two but it's always good to keep in mind that the renewables investments, we make actually go to to ASCO, three and we'll see how that develops here.
In the in the next little while as we start tracking that.
Thank you that's helpful.
Okay.
Thank you. This concludes the question and answer session and I will turn the call back over to John Jonathan Martin for his final remarks.
Thank you and thank you for joining us this morning as always we appreciate your ongoing interest in Enbridge, our Investor Relations team is available to address any additional questions. You may have and once again, thank you and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect everyone have a great. Thanks.
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