Q2 2019 Earnings Call
Jonathan you may begin.
Thank you Jamie good morning, and welcome to the Enbridge Inc. second quarter 2019 earnings call.
Joining me this morning are al Monaco, President and CEO .
Calling grounding Chief Financial Officer, Guy Jarvis President liquids pipelines, John Wieland, Chief Development Officer.
As per usual this call is webcast and I encourage those listening on the phone to follow online we're supporting slides.
A replay of the podcast.
Sorry, a replay and a podcast of the call will be available later today.
And transcript will be posted on the website shortly thereafter.
In terms of queuing day, we'll prioritize calls from the investment community. If you are a member of the media. Please direct your inquiries.
Our communications team, who will be happy to respond immediately.
We're going to target keeping the call to roughly one hour and may not be able to get to everybody. So please try to limit your questions to one and a follow up as necessary.
And as always our Investor Relations team is available for more detailed follow up questions. Afterwards.
On slide two I'll remind you that we will 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 the risks and uncertainties outlined here.
And discussed more fully in our public disclosure filings well also be referring to non-GAAP measures summarize below with that I'll turn the call over to al Monaco.
Thank you Jonathan.
Before we begin I'll comment on the incident and fatality yesterday on our Texas Eastern gas pipeline in Kentucky.
Our Hearts go out to the family and the community.
Our first concern of course is for those impacted so we've mobilized resources to assist and support them.
Secondly, we're working with the federal agencies to investigate what happened and how the learnings can improve our approach and that of the industry in the future.
Bill Yardley is on site. So we'll cover off for him on today's call.
Turning to the quarter I'll begin by highlighting the results and full year picture, followed by a business update and as part of the liquids update I'll speak to the recent headlines related to line five.
Connie will then take you through the financial performance and ill come back at the end with a mid year progress review.
Second quarter numbers were strong driven by high utilization across the businesses.
What stood out was continued high liquids throughput, especially in the mid continent region and energy service margins.
Q2, DCF per share increased 4%, which is a very good result, given the share issuance related to our four sponsored vehicle roll ups in Q4 last year.
Importantly, strong first half results should allow us to come in about the middle of our 430 to 460 per share DCF guidance range. Another good outcome in that we expect to fully mitigate the 2019 impact of the line three delay which was about eight cents a share.
Over to slide five beginning with liquids.
One of the things as you know we were focused on is low cost organic expansions that boost returns by enhancing revenue and minimizing or investment.
Since 2015, we've added 450000 barrels per day of capacity, which has been good for customers and illustrates the flexibility and scale of the mainline system.
This quarter, we finalized plans to add another 85000 barrels per day, which we ready ready later this year.
We've also landed on an ultra low cost expansion of 50000 barrels per day and express were an open season now on that one and should be ready in Q1.
In the Bakken our partner is an open season that could see the Bakken system increased capacity to over 1 million barrels per day, so very good progress on low cost enfranchise expansions.
Continuing on liquids on slide six now.
This morning as you saw we launched our mainline open season that will run for 60 days followed by the any be filing.
Which leaves a good amount of time ahead of the July 21 expiry of the current Cts agreement.
Weve outlined in the past the key aspects of the offering and repeated them here on the slide but here's how we got to this point.
Our new contract offering respond directly to what customers are asking for.
They've told us they want guaranteed access to our system, which serves the best markets in the Midwest and the U.S. Gulf Coast.
They want and need the lowest transportation cost system to those markets.
And they want long term toll certainty.
Those are the factors that drove our offering and we've spent the last nine months listening very carefully to customers and refining the offering.
That long period of consultation led to improvements that we've incorporated in the open season, namely balance access for all types of customers, whether they are producers integrated refiners marketers.
They had told discounts for long term contracts and importantly, ensuring smaller producers have access to the system.
We've got a diverse shipper group with sometimes conflicting objectives.
But we believe this offering addresses differing perspectives.
The nice thing is that all potential shippers will have access to the system.
So we're on our way here and will await the results of the open season.
And now on to slide seven and the status of line three.
Given the recent Eas court ruling we wanted to make sure everyone had the steps and sequencing that will go into completing the permitting process. Those are the items in the bars here on slide.
For context, the Eas was prepared by the state over 16 month period. So it was comprehensive and thorough to say least.
The state agencies, the administrative law judge and then the P. you see through an extensive hearing process review the Sun agreed it was complete.
But despite all that as you know the court upheld one appeal that now require some added analysis at one site.
The court unanimously unanimously dismiss the eight other appeals, but three of those were then appealed to the Minnesota Supreme Court.
The Supreme Court will rule, whether they will hear those by September threerd.
The PC believes there is a strong case to deny that reviewed the appeals and they have already filed against them.
The next critical step is for the PC to set the timing to recertify the Eas.
Because of that we won't be in a position to provide an expected in service date until we've evaluated the Pcs timetable.
What's noteworthy is that the PSC has publicly indicated that were expeditiously to complete the work.
The permitting agencies have also committed to work in parallel with the PSC process. So that is good news.
Finally, we'd all agree we've got to get on with it and replace the line. After all this is a safety and reliability project and in the meantime, we will continue to prepare for construction.
Before we move to gas transmission I'll briefly comment on line five that we are now on slide eight.
Slide five provides as a reminder, 540000 barrels per day of supply that is absolutely essential to the entire region and 40% of refined products in Michigan alone.
The line is operated safely and our regulator and others have validated that time and time again.
Despite this we listened to Michigan Anders and made a commitment to replace the Straits crossing with a tunnel.
Which first virtually eliminates risk to near zero.
Various experts in Michigan itself I agree with the tunnel the only misalignment with the state is timing.
We can't complete the tunnel into years simply not physically possible as the tunnel needs to be engineered permitted and constructed and that takes time to do right.
Line five needs to operate during that period to avoid supply disruption through the region.
And increased consumer energy prices from that.
To maintain share although we've proceeded with the geotechnical program this year.
Hopefully we can put all the legal wrangling aside and focus on collaboration with the state to get the project done as quick as possible.
In Wisconsin has been a recent challenge to the easement on one of the tribal lands as you know.
But first let me give you some context here on the bigger picture almost 100% of the easements across our systems are perpetual are very long term.
So very few need renewal that Austin if at all.
Where they do we work closely with land owners well in advance of expiring and we incorporate new commitments to address any concerns.
We take all of our landowner relationships very seriously, it's what we do.
And in all cases tribal easements have been renewed successfully for example.
We just extended easements with fond du Lac and the line court or Ray bans in Minnesota and Wisconsin.
In the case of Bad River, we've been engaged with the band for a number of years. In fact, we've had good discussions progress maintenance, we've shared a lot of information about our operations with the band.
We were being attentive in our view to their concerns and discussing various aspects of the easement. So we're not sure what led to the legal action.
The approach, we take us to work collaboratively with all right away communities and we'll continue to work with the band to address any concerns and as Dave said they are open to discussions as well.
This could include.
Options like rerouting, the 12 mile section, but we don't want to presume that until we get their full input.
Bottom line is that we expect to reach positive outcomes on the line five business issues.
In the near term.
Turning now to gas transmission.
A key focus of ours is to capitalize on LNG growth as you've heard us say before.
We're in great position as our gas systems follow the us Gulf Coast from South Texas to Louisiana.
We currently supply Shinier, Sabine pass and Cameron plants, we're making good progress on further buildout.
This quarter Stratton Ridge went into service, which flows gas to Freeport LNG.
And today, we've announced that we've been selected by venture global to serve their plaquemines facility in Louisiana.
This follows closely on the heels of global slightly less last year to serve their Kalamazoo LNG facility in Louisiana.
We are happy with the momentum here to expand and extend our gas pipeline network by capitalizing on our competitive position.
Finally on gas, it's been a busy year in terms of rate filings, we are progressing well and expect to reach settlements on Texas Eastern and Algonquin later this year.
On East, Tennessee, We filed a settlement agreement this quarter and we should get a FERC order shortly.
Moving onto the gas utility on slide 10.
This business is performing very well and growth continues on a few fronts.
We are moving forward with two modernization projects, which brings year to date secured growth to about $400 million, including the dawn to Parkway expansion, we talked about last quarter.
The Owen sound reinforcement in the Windsor line replacement will each earn solid returns under our new regulatory compact.
And that will be in service in late 2000, Twentys, So full year contribution in 2021.
We're also on track to add another 50000 customers this year and Ontario support for community expansion means we have more runway to grow the utility and those are the white circles that you see on the map.
Finally, we are making progress on the amalgamation of the two utilities, which drive synergies for us.
It will generate good margin over the loud are weak.
Ill now cover the positive F.I.D., we announced today on one of our offshore wind projects in France sentences there.
But before that let me provide some context for everyone on how we see the offshore wind business. This is now on slide 11.
First of all it's very clear that energy demand, we will continue to grow for decades to come.
But the fact is we're going to need all sources of energy, both conventional and renewables to meet that demand.
We've got ample runway to invest in our pipeline utility businesses, but our approach to approach has been to invest renewables, where it makes sense.
We've gradually and slowly develop the business over the last 15 years today, we've got 21 renewable projects and a growing offshore presence in Europe .
Last year, we monetized about half of most of our onshore projects to capitalize on the external valuations we saw.
And recycle cash for other uses in the business.
The fundamentals of offshore wind or positive, namely an increasing share of electricity demand that will be met by electricity.
Shifting consumer preferences, as we know and mandated renewables targets.
And significant improvements in technology, and greater scale, that's driven down costs.
In terms of capital allocation, though off for renewables meet the same investment criteria for the rest of our business.
They line up very well and return.
Predictability of cash flow.
Execution, and our ability to manage capex risk and they have room to grow.
Moving on to slide 12.
European offshore wind is our focus now driven by the strong fundamentals that you see here itemized on the chart.
Importantly, we have seen a major improvement in the depth and sophistication of the supply chain in Europe , and that's part of the cost improvements that we've seen.
We built a strong business by aligning with great partners, developing our own capability and bringing our execution skills around offshore and the wind generally.
We've got a nice portfolio of operating and development projects. Our UK Rampion project is in service and who we say in Germany is progressing well for late this year combined those two projects are actually one gigawatt of capacity.
We have three late stage development projects in France.
All three of just cleared permitting and we're recently awarded another PPA.
This week, we have F. I did the first one of these in the queue sentence, there with our partner F. This the one on the northwest coast that you see on the slide.
Our $1.8 billion investment comes with a mid teen return, but what we really like about it is the PPA comes with embedded protection for wind production variances. So you've got excellent transparency to cash flow and this is actually a very unique fee structure.
Importantly, this is a project finance, which results in minimal equity requirement by us of about 300 million equivalent. So it's easily falling within our self funding plan and we'd expect to be generating cash flow by late 2022.
Moving forward with St is there makes two other permitted French projects more likely to be fighting ready over the next 12 to 18 months, but that of course will be subject to the same investment criteria that I mentioned earlier.
I'll wrap up on slide 13, with a summary of the secured project inventory.
The slide here is basically the running balance of secured capital, which now sits at about 19 billion. So an increase of two and a half b. This year so far.
All this growth fits squarely within our low risk pipeline utility model and demonstrates the solid expansion and extension potential of the core assets.
Importantly, this newly secured capital is provided for within our equity self funding model, which call and we'll speak to.
And post 2020, we'll have a lot of free cash flow to fund new growth capital and fill in our annual five to 6 billion growth bucket.
So with that let me hand, it over to Collin to provide the financial update.
Thanks, Al and good morning, everyone.
This is my first quarter, ending the CFO role and I'm pleased to report that the financial results for the first half of the year our strong.
In fact, it's more of the same diversified earnings and cash flows that you've become accustomed to from Enbridge.
Slide 14 summarizes our financial performance for the quarter by segment focusing first on adjusted EBITDA.
Even after factoring in our simplification and recent asset sales we've had a strong year. So far this is driven by strong operating performance from our core assets.
Incremental contributions from the $7 billion of new capital growth projects. We brought into service later last year as well as continued strong margins in our energy services segment.
So overall this translated into adjusted EBITDA for the quarter at just over 3.2 billion.
I'll now briefly walk through each of the businesses.
Quarter over quarter EBITDA from liquids pipelines was up $137 million, primarily due to continued strong throughput right across the liquids system.
Simply put our systems are full.
Relative to last year. The main line benefited from both an increase to the international joint tariff and higher average quarterly throughput.
Average deliveries ex Gretna for the quarter were up 25000 barrels per day over Q2 of last year largely due to continued optimization of the system.
Downstream, we also saw strong utilization on our mid continent and market access pipelines.
Flanagan South.
Spearhead and Seaway.
The strong fundamental heavy crude pull from the Gulf should continue and our Utilizations should continue to benefit.
Also the Bakken system can you to port performed very well benefiting from strong production growth in North Dakota.
Moving down or on the slide.
Second quarter, adjusted EBITDA from our gas transmission and midstream business was down $96 million from last year. Two factors drove the decrease the first was the absence of earnings from the us and Canadian gathering and processing assets that we sold in the back half of last year.
Secondly, we are working through a comprehensive integrity program and we expect this to result in higher integrity expense through the course of 29 team.
I'll come back to this later.
Partially offsetting this was the strong and steady performance from our core GTM assets and contributions from valley crossing which you remember it was brought into service late last year.
Gas distribution adjusted EBITDA increased by 21 million for the second quarter.
This increase was largely due to the higher distribution rates and growth in customer base.
Compounded by a colder spring and Ontario.
Renewable power generation was down from last year.
Operating performance was strong in Canada, and the new Rampion UK facility has ramped up in line with expectations, but these were offset by weaker wind resources in the United States.
Energy services was up 26 million when compared to the second quarter of last year.
As you recall wide crude oil differentials in the later part of last year and early this year created opportunities to lock in profitable forward arbitrage margins and drove our exceptionally strong Q1 results.
Some of those opportunities continued into Q2, although not to the same degree.
Nonetheless, it drove a year over year growth in the second quarter segment.
Looking ahead, we have seen differentials tighten.
So while still positive we are not expecting energy services results in the second half of the year to be comparable with the first half.
Finally, turning to eliminations and other EBITDA was down $20 million year over year, primarily due to hedge settlements on our enterprise foreign exchange hedging program related to the stronger dollar during the quarter.
So overall another strong quarter in a really strong first half across most of our businesses.
Im now moving on to slide 15, which reconciles to DCF.
Absolute DCF came in at 2.3 billion up 24% relative to the second quarter of last year.
The significant increase is largely driven by the volume of our sponsored vehicles.
Which means we now retain all of the cash from those assets.
The per share metrics, Conversely reflect the equity issued to buy.
These vehicles in.
In addition to that as you can see on the right hand portion of the slide most of the factors were positive to DCF year over year.
Starting with strong operating performance, which I just walked through.
We had lower maintenance capital expenditures compared to last year.
Mostly due again to the asset divestitures.
But we do expect our maintenance capital expenditures to ramp up in the second half of the year similar to the prior year seasonal profile.
And still in line with our full year annual maintenance Capex guidance of approximately $1.2 billion.
Financing costs were lower due to the application of proceeds from last year's asset sales to debt reduction.
We had lower current tax reflecting newly enacted tax legislation during the quarter, which lowered recorded current taxes.
Year to date, our current taxes in line with our own expectations and our full year outlook.
For current tax remains approximately $400 million inline with our prior guidance.
Lastly distributions in excess of equity earnings were higher in the second quarter due to strong operating performances on assets like Seaway and our Bakken investments.
As new assets placed into service by our joint Ventures for example, Nexus.
All of which supported.
Year over year higher cash distributions.
Okay.
Turning now to slide 16 in our financial outlook for 2019.
We had a very strong first half of the year ahead of our own expectations. However, as I had mentioned earlier some of this outperformance is unlikely to be repeatable in the second half of the year.
We've identified some guidance variances materializing in the back half as follows.
First in our original guidance, we had contemplated and November 2019 in service date for line three.
As discussed we have estimated that for every month line three is delayed DCF per share is impacted by approximately four cents.
So thats eight cents of expected variance drag later this year second.
We have also started seeing the impact of higher than guided.
Excuse me integrity expense in GTM during Q2.
And we expect this to ramp up throughout the remainder of the year as we execute the integrity program.
We estimate that that drag is approximately $100 million for the back half of the year or five cents.
Per share.
Third we expect to see higher operating and administrative spending in the second half of the year, which is just timing related.
And finally.
As mentioned, we don't foresee the same market conditions that have led to the outsized energy services arbitrage opportunities in the second half.
So overall, a really strong first half, but we expect to revert back to the middle.
Of the range by year end.
As it relates to our 2020 I will look we're not going to be in a position to update our previous guidance until we've evaluated the Minnesota Pcs timetable.
For the line three process in Minnesota.
I'll wrap up my section here on slide 17, with a few comments on funding and the balance sheet.
We've made significant progress on strengthening the balance sheet.
Our operating and financial performance has been strong and we also sold $8 billion of noncore assets last year.
Which in combination has greatly enhanced our financial flexibility.
These actions also allowed us to eliminate our drip program last year. So we're now in self funded growth mode.
And our credit metrics are right in line with our longer term targets and rating agency expectations with improved consolidated debt to EBITDA at June Thirtyth.
Of 4.6 times and that's that's down from 4.7.
On a trailing 12 month basis.
We forecast being comfortably within our target range for the rest of this year and next.
And Thats after accounting for the delay in line three cash flows and factoring in our secured spend as well as new projects Backfilling the inventory in coming years.
Specifically on the scene as our investment we announced today.
I confirm it will be nonrecourse project debt financed and therefore, our equity contribution to the project will only be $300 million.
Some of which is being spent already through Dev acts and the rest will still be a few years out at cod in late 2022.
And when line three does come into service absent other actions, we could dip below our 4.5 to five times.
Debt to EBITDA target, which will provide even more dry powder to sell fund additional future growth.
And with that I'll turn it back to al to wrap up.
Okay. Thanks, Colin so just to conclude here.
Ill summarize the progress and the priorities that we set at the beginning of the year.
Based on first half and the outlook for the second half was calling was talking about we can safely say we're on track to deliver on a promise results. Even after the line three delay impact for 19 online three though we're obviously very disappointed with the courts Eas decision.
Given the extensive review that I referred to earlier and the overwhelming support for the project.
That said and we're moving forward.
To get this work done because the line does need to be replaced.
We launched an open season for long term contracts on the mainline and expect to have this in front of the regulator by year end.
And we have secured two and half be of new capital year to date, which will help extend the growth post 2020.
And again these projects are down the middle of the fairway and we expect more to come along as well.
Balance sheet wise, we're in good shape debt to EBITDA stands at four six as Collin said and we expect to remain at this low end of our target through year end.
So with that lets turn it over to the operator to start the Q and a session.
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 sign or the hash key if you are using a speaker falling you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press star one on your Touchtone phone.
Yes.
Operator are there any.
Questions in the queue, yes. Our first question is going to be from Jeremy Tonet from JP Morgan. Your line is now open.
Good morning.
Morning.
Just wanted to start off with the offshore business and.
Seems like there is a bit more of a focus here as far as what capital could be deployed.
Just wondering how big do you see this opportunity set how does this opportunity compete versus other.
Other projects you have for capital and just wondering you know how big could this segment get versus some of the other ones out there, obviously and bridge being a large company and it takes a while to make a difference, but just kind of curious strategically looking forward how offshore fits now.
Right.
It's a good question Jeremy so.
Bigger picture here, obviously in terms of the rest of the other businesses. The current contribution from renewables is relatively small under under 5%.
The way, we're looking at it strategically Jeremy as I said.
It's almost like the asset base is reflecting the.
The overall energy mix and as you know renewables are still very small in the broader energy context, so we feel that having a little bit of capital in that area.
Mix makes some sense provided that the projects can hit the same returns.
As the rest of the business and certainly the ones that we're seeing out there in the European offshore wind fit as well if not better in some cases then.
The projects that we're seeing in the conventional business, let's call. It in terms of the growth capital.
The way, we see it here, we'd like to see.
It strong out in terms of the deployment over the next 2345 years as Colin mentioned here are actual capital out on this first project is is quite small and then if we can.
Lay in the next two projects if they meet the F.I.D. requirements over the next three to four years, then that's ideal and of course, you are bringing on EBITDA as you go so I would say its a.
A steady.
Gradual pursuit of offshore, but certainly not.
Rivaling the other core businesses at least within the next little while.
That's helpful. Thanks, and then.
Just turning to the U.S. side I was wondering if you could comment a bit more about how Gulf coast presence is coming together with crude oil and how you see the kind of your export project moving forward. There's some other kind of developments with competitors out there and just wondering if you could update us on that platform and if I could sneak in with Petco.
Downtime or ability to reroute around the cash.
Okay, well, let me let me start with Tetco then.
I think it's probably too early to tell where we're out here I'm not I don't think we can provide an estimate of when the timing will be for restart. The NTSB is currently on site of course, and we're coordinating with them I think we're probably going to know more Jeremy in the next.
And next few days, so we'll have to wait on that when given the incident just occurred so we've got some work to do to figure that out.
In terms of your.
Gulf Coast strategy comment I think that what we've been able to do here is demonstrated in their likely be more.
Opportunities to follow.
On the gas side, we're just so well position there in terms of our existing infrastructure that in some ways. We become the natural go to for bringing a supply to two these LNG plants in what we call. The next wave of LNG projects that are that are hopefully going to sanction here by the LNG developers on the.
On the liquid side of the business I'd say that.
We have a very good position there I call it a bit of a.
A starter kit if you will we've got great assets with CE way, we're going to have great Elk in source, we're starting to build out and we're looking for opportunities and hopefully we'll.
See ways to build that out.
In the next little out here, so thats, where we are generally on the export strategy.
That's very helpful. Thank you.
Okay.
Thank you.
And our next question comes from Matt Taylor from Tudor Pickering Holt. Your line is now open.
Hey, Thanks for taking my questions here.
Go into line five trying to understand the timing of a potential rerouting option that you disclosed you might be willing to do.
Well, if you called out some environmental risk, obviously still under review there, but just the pace we've seen regulatory processes move forward. So just to be there might be some to do in the in terms of I was just curious how you're thinking about that risk and potential options moving forward there.
Okay, Matt maybe we'll have guy talked to that one.
Yes, so obviously a re route will require regulatory approvals and will take some time.
I think as we think through that.
Whether we first off whether we pursue a rewrote and how that shapes up will obviously be a function of our conversations.
With Bad River.
So.
Having that as the background, we would expect that if we're in a reroute scenario that it would be with us.
Support from from the band for the rewrote, which we think would help us in securing the regulatory authorizations, but you're right. It would take some time so.
Part of the conversation that we have been having is.
Making sure that the operation of line five across the reservation in that interim period continues to be safe as it is today.
Great. That's helpful. And then maybe just one more from me another nice win there on the on the potential LNG interconnect can you just help me understand.
Now it's a couple in the queue there the value proposition that allowed you to win that project and what's obviously, a very competitive market. There. So just kind of learnings from that project and how you're seeing.
The growth build out there.
Just to clarify Matt you were talking about the Calcutta Zoo plant and our project to feed it yes precisely yes.
Oh, sorry, plaquemine, okay sorry.
Yes. So what this is a very good example of how existing infrastructure can help and we've got.
A leg.
In the in the facilities, we have that aren't very highly utilized so.
Ability to reverse that leg and expand the existing segment that we have into that region gives us a big advantage in terms of feeding the plant with very low cost transportation and don't forget part of it is the header system that we have all along the Gulf. So that from an LNG plant perspective, what you want is diversity of supply and and for sure. We are connected to all the right areas of supply. So all in this is the kind of thing that can drive more and more opportunity given the position we're in with our existing assets and ability to source diversifies diversified supply into the plan.
Great. That's helpful color. Thank you very much.
Okay.
Thank you. Our next question is from Linda Ezergailis from TD Securities. Your line is now open.
Thank you.
I'm wondering if you could kind of round out our understanding a little bit.
The open season, you just launched on the mainline.
Specifically I'm wondering if you could provide some color around the attributes for risk sharing with your shippers.
I know in past agreements there were volume off ramps.
There were clauses.
Allowing sort of unexpected costs related to legislation to flow through.
And I'm assuming that.
Shippers will not be absorbing any sort of incremental capital expenditures on any front related to tunnels et cetera.
But can you walk us through some of those attributes there might we have to wait until you're.
Finally, with the regulator later this year.
Yes, Linda its guy I think we're probably not going to go too far into that I think maybe just to address a couple of things you raised.
Going to a contract approach would negate the need assuming success of the open season for volume off ramp. So we don't foresee that being a part of the puzzle.
I think as you alluded to there will be a continuation of a lot of the risks that we have been managing throughout the Cts agreement.
In part because we think we become very good at it.
And it goes to the certainty of the tool that al referenced earlier so.
I think final point I would say as with most agreements.
Should something dramatically unusual will come out of left field.
Either through a regulatory requirement or some other means.
We would have some degree of protection, but I think thats about as far as I want to go I think guy there was a reference in Linda's question I think to buying five around being it being contemplated and the answer to that one is yes.
In the way Weve looked at the new offering we would account for the cost of the tunnel I guess threat as Tim correct.
That's helpful.
Moving onto your near term operations.
I appreciate the update on.
Cash taxes for 2019.
But maybe beyond 2019 with some of the.
Canadian tax changes can you give us an update on that.
The run rate of cash taxes.
Next year and beyond and maybe also your effective tax rate given what's going on in Alberta.
Sure Linda.
So, yes, we guided about $400 million of cash tax in 2019 for 2020, its it up takes a little bit about 500.
Ish.
I think our effective tax rate for the years approximately 20%.
In 2020 or 2019.
2019.
Okay, and does that kind of trend down a little bit over the next couple of years.
Pretty similar.
That's helpful. Thanks, I'll jump back in the queue.
Thanks Linda.
Thank you. Our next question is from Shenhar Gershuni from U.B.S. Your line is now open.
Hi, good morning, everyone.
Really appreciate the color today.
Hello.
Hi can you hear me.
Yes, we can hear you go ahead.
Okay, sorry about that okay. So.
I guess my first question.
With respect to 2020.
I completely understand your reluctance to give any guidance given.
Yes, he hasn't given an update on the process, but has anything else changed with respect to your outlook for 2020, I mean, we can make our own assumptions about line three or just take it out so forth.
But are there any other moving parts that would have taken your 2020 guidance upward down.
Based on other announcements.
Yes. Thanks, I think generally will that will defer to until Enbridge day for 2020 guidance overall, but.
If you look through some of the trends I think you could look at our base business and the strength that we reported so far this year. There are some areas that will continue.
Around the liquids business certainly.
And.
I mean other than that.
Continued cost management.
Management of taxes interest rates, we've talked about that so I think.
I think in large part line three will be the biggest delta from the guidance, we provided so far and we'll update our guidance in December .
Okay that makes sense and then just quickly over 2.5.
You know I really appreciate all the color that you gave and so forth and you sort of sounded like you had a bunch of different solutions and so forth.
But is the solution in your hands right now or where is that in the courts.
As a final say in.
In the draconian scenario, what do you expect or what would you estimate the loss to EBITDA would be if the worst case scenario plays itself out.
Yes, so its guy.
Obviously, there is a court proceeding going on we certainly don't take the view that the issue is in the courts hands, that's going to that will play out.
As it's going to play out.
But.
We are interested in continuing to resolve this issue through the continuing collaboration that we've had with bad River to this point.
They've signaled their willingness to continue talking and we fully expect that to happen.
Going down the legal process, if that prevails as the process, we expect will be.
A multi year process that really isn't going to be to the benefit of either party in this scenario.
To go to your question about the draconian side of things, we look at line five and the important first off line five is safe and its operating safe today and it will be offered unsafe for a long time to come.
The energy that supplies is so important to that region that we are not looking at a scenario of it being shut down as being feasible at this point in time.
We've never gone down in our financial reporting to the level of reporting on a specific line within the mainline.
And we're not going to do that at this stage the only message we have is it.
You could people know what the capacity is they can determine what our tolls are there are public and simply multiplying those two numbers together is going to get you an answer that is not correct.
So I mean it.
Without people understanding what the downside is it's hard to.
You know hard hard for investors to actually capitalize correctly or understand what the risk grounds is theres not by not giving that information does that potentially increase your equity risk premium just because of the uncertainty.
And Peter on the risk that people make bigger assumptions on the downside.
I think she interruption, where its Alan we understand the question and desire for more information here, but basically what we're saying is theres lots of risks we managing the business in this case, we see it as a very low.
Probability outcome.
So when you add that to what.
Guy was talking about around what's publicly out there already and I think his point around simply multiplying tolls with volume.
Is a good one because.
You know in in the low probability event that that you're referring to certainly we have to do some other things to move volumes to other parts of the system. So.
As you said I think thats, our position today and.
Other than that I think that's that's where we are.
All right great really appreciate the color guys. Thank you and have a great weekend.
Okay. Thanks, Sean.
Thank you. Our next question is from Rob <unk> from Scotia Bank. Your line is now open.
Good morning first questions on the on the gas transmission integrity pickup in the back half of the year.
Just want to confirm that this would be incremental to your 2019 guidance and just want to get a sense just given some of the issues.
NBC as well as this week could we see higher integrity spend on gas transmission trending up over the next couple of years.
Hey, Rob it's called yes. Thanks so.
The amount you I referred to earlier was on the expense side.
And that is incremental to the 2019 guidance, we provided at Enbridge day and it relates to programs. We've we've commenced.
Earlier this year to to reevaluate the system so.
And we provided.
Associated capital for that in our.
Maintenance capital guidance for 2019.
So just a quick add onto what Colin said to for context here, Rob So back in I guess it was December we undertook.
Our review of the gas system, and and with that we advance some inline inspections, we initiated some new ones, we did some engineering assessments and.
Obviously lots of maintenance work as well so.
Thats what prompted.
The increase that you are referring to but just to be clear the amount that we're talking about is already been considered within our comments around the guidance for this year.
And is the expectation that we could see continued higher levels of integrity in 2020 and beyond.
It's probably in the same order of magnitude as we have this year, maybe a touch higher but that's our view at this point.
Okay, and then just touching back on a prior line five question.
In a low probability event, where line five is shut down for one reason or another how much flexibility do you have in your system or how much flexibility you can you gain in your system to shift volumes kind of south of Lake Michigan enough.
Yes, so its guy.
Obviously, one of the benefits of our mainline system is the flexibility that it does have.
So we do see an opportunity to to manage some of that situation in the event that manifests obviously.
In addition to our the flexibility that we do have it will be a function of what our shippers want to do in that scenario in terms of what crudes, they have and where they would want to try and take them.
Maybe Rob I could just provide one bit of context here because I think guys previous point was right about the demand in that market side of this equation and it goes to the previous question around.
Probabilities and for this kind of thing happening, Michigan needs about 450000 barrels per day of crude to meet their needs and they only get a very small amount of that from the Detroit refinery that leaves a good chunk of crude that needs to be sourced from other states, So high or Indiana, Illinois, and then in Ontario. So.
If you if you do that scenario from the demand point of view.
And you take out that volume out of the system into that region, you're looking at roughly 40% to 50% shortages in Michigan itself and let's not forget line five supplies.
All the volume, including Detroit, and so not having that it's just hard to see how you compensate for that level of disruption and so that's that's that's really the point I think youre going to see massive increases in energy consumer costs, if that low probability event were to happen and thats, partially the reason why we're saying it's low probability.
Thanks for the color.
Okay. Thanks, Rob.
Thank you. Our next question is from Robert Catellier from C. Ibcs capital markets. Your line is now open.
Hi, Good morning, sorry to hear about your news with Texas Eastern and good luck with dealing with community issues on that.
Thank you Mike.
My question was.
Related to loan volume as well.
Im just curious as to when you think you'll be in a position to file applications for.
For the tunnel if in fact, you do that and whether or not that is contained.
On.
Getting some of the previous state first.
On the legal issues.
Yes, so its guy.
We have our Geo technical program underway this summer.
That will start dialing up some more detailed engineering around the project towards the end of the year.
Assuming things progress as planned we would like to be in a position.
Sometime in the first quarter of next year to make the necessary applications.
But to your point I think.
Before doing that we're going to need to evaluate where we are at both in the legal perspective of discussions or where we might be out in terms of discussions with the state.
That makes sense.
This morning in the.
Press release, there were some improvements to your capacity if true some optimizations.
Just wondering if you could give us an update with respect to.
Potential southern lights.
Personal for where that stands in terms of your own operational priorities.
Yes, so we've had those.
Potential mainline expansion options out there for for some time now.
At this stage of the game I think the best way to characterize what's happened is as our focus with our shippers has been on the open season and the mainline contracting because until we see the result of that.
That's going to be the greatest indicator of whether theres demand for for further expansion of our system. So.
Those options are out there we've continued to have discussions.
I think we've said historically southern lights is the one that would probably come last just given the nature of what needs to be done.
And and the commercial considerations around.
You know its current service and condensate so it's up it's a possibility that's up there, but it's not actively being pursued.
Given our focus on the open season, I think Guy's point is right on because in fact, it's a bit circular route because the open season itself and the re contracting or contracting of the mainline one of the big benefits there as it provides a commercial underpinning for what will happen in the future and having that locked in.
Certainly it will allow us and the shipping community have greater transparency on what we can do to expand the whether it's the one you mentioned or or downstream expansions of the system further into the Gulf for example.
Okay fantastic. Thank you.
Okay. Thanks.
Thank you and our next question is from Friendly's Satish from Wells Fargo. Your line is now open.
Hi, Good morning, So you sold some wind assets last year. So I'm just curious what's different about the wind farm that you're developing in France that I guess makes you confident to keep investing capital there over the next few years.
Yes, it's al speaking permit.
I think the biggest thing here in terms of the difference as I referred to earlier in my remarks is that on the offshore wind business in North America. Our view was that the growth opportunities there under the commercial model that we.
Covet.
Where we have long term PPA days with good returns and.
And capital risk that we can manage well.
I sort of waning in terms of those opportunities in North America. So at the same time, we had this.
Obviously, you know about the the inflow of private equity and capital chasing certain kinds of assets. So we basically took the opportunity.
To to monetize half at a very good valuation given that we thought the growth prospects were lower Europe is different in that.
There's lots of opportunities for very good long term PPA case.
The.
The support for those kinds of projects is very high there and a good chunk of future generation is going to come from renewables.
In Europe so.
It's really.
A trade if you will between focusing on.
Our growth here part of this particular asset category. So thats the reason.
Okay, Great and then I just wanted to touch on the potential alliance expansion. So the last open season that you guys tried to do there.
I don't think got the the commitments that you wanted so I guess whats change. This go around that gives you the confidence to proceed with it.
Yes. Good question so on alliance.
We've essentially for the reasons you noted sort of shifted the focus here, we think longer term, there's excellent opportunity for expansion on alliance all through the system just given.
The egress challenges that are there in western Canada. So we've essentially shifted the timing here to focus on the US segment first and as you know the Bakken growth potential is very large and there is lots of liquids there as well so we've essentially shifted the timing.
To focus on the US side first and we're seeing good opportunity. There. We're in discussions now with potential shippers and hopefully we'll have something near the end of the year.
And by the way that would include that would include.
Potential expansion of the OCC Sable.
Frac facility in Chicago.
Great. Thank you.
Okay.
Thank you and our next question is from Ben Pham from BMO. Your line is now open.
Okay. Thanks, Good morning, I had a couple of follow up questions on the mainline open season.
It looks like you're you're adding to the altira.
Okay.
Volumes and in that sense.
And I guess I'm curious if that makes a lot of sense you want to maximize the contracts on on that.
2021, but how do you guys kind of think about managing.
Maximizing contracting with.
Timing.
On Sarnia out you're on and just just gone through the regulatory process, where you do need a certain amount that spot.
Yes, so its guy ill take a crack at that from a number of different angles first and foremost at this stage of the game. We still believe there is a good opportunity that line three is going to be replaced an in service ahead of July 2021.
Which is the foundational reason for moving ahead with contracting.
The full capacity.
At the start of those contracts will.
We'll be upon the start up of line three if sort of line three is delayed by a couple of months will will delay the start of the contracts for a few months. So that's already built in there.
I think your your question I'm, assuming your question around spot capacity is our plan to allocate 10%.
That is a very consistent measure if you look at open seasons around.
Contracted pipelines throughout both counted in the U.S., 10% level of spot capacity is very common and thats why weve chosen to use that one.
Okay, all right thanks and.
And then on this.
If you're successful with contracting and then as primary Greg It supports that.
How do you think the opportunity is for you with the credit rating agencies I mean, it looks like you've been moving to us.
Pure play utility like like model is there is this potentially credit accretive to you guys long term.
Hey, Ben it's calling I think that.
That will be credit positive I think the agencies view.
The mainline already pretty favorably given its competitive position, but the contracts and hopefully the tenor of the contract should.
Enhance the credit.
Profile further.
All right great. Thanks, everybody.
Thank you Beth.
Thank you.
And our next question is from challenge I know from Morningstar. Your line is now open.
Thank you just a couple of questions short questions first regarding the.
The potential mainline expansion for later this year is there a regulatory process that you need to go through to get those approvals and.
Turning to next year with the potential of extending the line three delay do you see any impact on the 10% dividend growth guidance. Thank you.
So its guy ill take the first one.
If you're referencing kind of the mainline optimizations and whatnot that we've talked about that 85000 barrels per day. There there are no regulatory requirements associated with that okay.
On the second part Joe So.
In terms of the dividend policy approach that we take.
It's really based on a multi year look.
What the cash flows are going to be and how much we're going to generate out of the business. So as you know we've set.
The 10% growth.
Basically from 18 through 20.
Thats what it continues to be given our view of the underlying cash flows and the strength and so that's that's there hasn't been a change in that view, obviously, we confirm those dividends.
Decisions.
Near the end of the year.
This case probably.
And in November .
Great. Thank you very much.
Okay. Thank you.
Thank you and our next question is from Michael Lapidus from Goldman Sachs. Your line is now open.
Hey, guys.
Just to line three question I know Youre talking you've talked a lot today about the IRS process, but what happens now with the appeals for both the certificate of need and the route permit.
Those appeals actually get hurt or did those just go back to the PC for literally rewriting of the the CNN the RP.
So its guy ill take I'll take a crack at that.
So right now the appeals of the certificate of need have been stayed.
By the courts.
And the route permit appeals have always kind of been position that.
Until the appeals of the certificate of need or dealt with they won't they are not planning to deal with this or that route permit. So it's the route permit is kind of out there and not really being acted upon anyway.
I think.
It.
It's going to be a function of what the P. you see determines they do and the process that they follow in terms of completing the IRS and and recertifying the certificate of need and route permits that will then.
Determine what might might or might not happen on the appeal side of things. So it's a bit of an update on where we're at today the process and how it will unfold will be largely dictated by the process that the PC determined they will follow.
Meaning the PMC could make adjustments to the RP in the CN and that would either have to get reviewed and approved by the hour and voted on by the PC again.
And and that would sideline or make the appeal a relevant or would that just get folded into the current appellate case.
All right our expectation is that given the narrow nature of the one issue that has been raised on appeal around that yes that there will not be a need to kind to reopen all of the proceedings around the certificate of need and route permit.
Got it. So then those appellate cases would just pick back up again once the station was done.
Correct that's our.
Our assumption if that's what happens when we present year presuming that but yes.
Okay, and then just a question on the U.S. gas transmission business, how material do you think the rate changes at the three pipes that are in kind of rate reviews right now so for Algonquin, Texas Eastern East, Tennessee.
How material that change when we think about 2020 and beyond.
Well that's a good question, Mike So I mean, that's obviously part of what we're doing here in the settlement discussions is.
On making sure that while we want to catch up for example on Texas Eastern for the the number years that we haven't been.
Updating our rates I think we've got to balance that with the fact that it's still a competitive.
World out there and we are taking that into account, let's put it that way.
While we go through settlement discussions so I don't want to comment on what rates could be and remember half the rates here.
Our it's only half the rates that are subject to this process. The other half are negotiated and of course they wouldn't.
Be affected because they are in place for longer terms, So I guess.
You know, we don't expect that it's going to change our competitive position.
Okay place like for one of the pipes, you've got a settlement already filed at the FERC can you just give us some for the public document.
Just a little bit of kind of directional.
Doesn't imply an increase a decrease to the revenue requirement at that pipe.
Yes, I think you're talking about east, Tennessee, which is I believe it was 3%. So it's de Minimis in terms of.
The impact on revenue to us.
And also on that one will likely be moving to filing a full rate case in the coming years.
Got it thank you guys much appreciated.
Okay, Mike Thanks.
Thank you.
And our next question is from Patrick Kenny from National Bank. Your line is now open.
Yeah. Good morning, just maybe back to the mainland open season here.
Wondering if you can comment on how some of these other recent eagerness developments may be impacting shipper demand.
You know a few smaller open seasons out there, including your own offering additional capacity out of Western Canada.
There is a cap line reversal de bottlenecking the Midwest.
Again, just wanted to get your thoughts as to whether or not.
Net net.
These other open seasons are having a positive or negative effect on demand for long term commitments on the mainline.
Yes, so its guy ill take a crack at that I think as we think through that it really boils down to what do producers want to do with their barrels.
These these other actions on on other pipelines really aren't having an impact on.
Kind of our traditional downstream refining market in terms of their desire to continue to utilize our system.
We went through the exercise of negotiating where we've landed in on the open season in the approach and the producers made it very clear to us that they wanted to have a level playing field in terms of their ability.
To participate in the open season versus refiners and we've given them that.
So the there is a signal from them that they want to ship on our system.
But I think until we get into the results of the open season, we it we can't speculate on their views of going on Enbridge versus other alternatives.
Expressed as a bit of a different animal in that we've begun to see some refinery creep in that Rocky Mountain region.
So its a boat egress, so obviously, but it's also about some growing demands in that area. So we think that when it's got a good chance of being successful just bigger picture here, though.
If you think about some of these smaller open seasons.
Certainly they are not going to move the dial to what has become the broader issue as a western Canadian.
Let's call it pure upstream producer in that.
The whole game for the future is going to be certainty of the grass and that's why you know the open season for us and our and their ability to contract and get surety not only provide security for volume that they have but in the bigger picture.
Their growth and the optimization and capitalization of their total upstream resource potential.
Is really driven by that Assurity to access and so that's why we think.
The offering that we're putting out provides not just near term benefits for access, but I think it really helps the overall picture in the base and long term.
And given that appetite for us certainty is it safe to say that the contracted tools coming out of the open season might land.
No at least equal to.
The current Cts tool or.
Should we expecting a little bit of a.
A downtick here just given the discounts being offered for term and volume.
Well, we're not going to get into that because that is not public information at this point I think what we said, though in the past is basically what you've said.
Yes.
Actually that you can assume the exit toll is it about the same rate there'll be Scully later in the toll in the agreement just like there is today under the existing Cts, but I don't think your assumptions too far off.
Okay, that's great. Thanks, a lot ill.
Okay.
Thank you. This concludes the question and answer session I will now turn the call over to Jonathan Morgan for final remarks.
Great. Thank you Jay.
Thank you everyone for your time and interest in Enbridge today as always our IR team is available to take additional follow ups and have a great day. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.