It wasn't that long ago that Enbridge (ENB 2.40%) planned to be a dividend growth engine for its investors. After acquiring Spectra Energy and all its subsidiary partnerships, the combined company had an audacious spending plan and an immense backlog of projects. This past quarter, though, that plan was tweaked slightly as management is rethinking some of its capital allocation priorities.
Here's a brief rundown of Enbridge's most recent quarterly report and how management is slightly shifting its strategy.
Enbridge earnings: The raw numbers
|Metric||Q4 2017||Q3 2017||Q4 2016|
|Revenue||CA$12.9 billion||CA$9.2 billion||CA$9.3 billion|
|Earnings attributable to common shareholders||CA$207 million||CA$765 million||CA$365 million|
|Distributable cash flow*||CA$1.74 billion||CA$1.34 billion||CA$879 million|
Don't freak out: Enbridge's fourth-quarter result wasn't less than a third of its prior quarter. Much of that change relates to the updated U.S. tax code. According to management, the company took a CA$2.0 billion charge to write down about CA$2.0 billion in deferred tax liabilities it had on the balance sheet. This is a non-cash charge that should have no bearing on the company's results in future quarters.
On top of the changes related to the tax code, Enbridge made several changes to the way it reports its earnings. Instead of reporting its business segments on an earnings basis, the company now reports segment data on an adjusted EBITDA basis. As a result, it's hard to determine how this past quarter stacked up against the prior one. Also, since the company had not yet closed its merger with Spectra Energy this time last year, the comparison between the two doesn't give an accurate reflection of how the business is doing.
What happened with Enbridge this quarter?
- Aside from some regulatory hurdles in Minnesota, the Line 3 replacement program continues to progress on schedule. It has completed work in Wisconsin and South Dakota and has replaced more than 400 kilometers of pipe in Canada. Enbridge expects a vote from the Minnesota regulatory commission in June and to have the project complete by the second half of 2019.
- The company met its goal of bringing CA$12 billion in projects into service in 2017. According to its construction schedule, it will bring another CA$7 billion in projects on line in 2018.
- Management also delivered its new strategic plan for 2018-2020. The three priorities from this new strategy will be to de-lever the balance sheet to a target debt-to-EBITDA ratio of 5.0, sell non-core assets, and make some corporate changes to streamline the business.
- It intends to achieve this goal and still deliver distribution growth in excess of 10% annually through 2020.
What management had to say
In the press release, CEO Al Monaco gives a rough outline of the company's strategic plan over the next few years. Keep in mind he is talking in terms of Canadian dollars.
Looking forward, with our updated strategic and financial plan, we've set a course for the next three years that reflects the right combination of capital discipline while deleveraging the balance sheet and maintaining ample funding flexibility for our $22 billion secured project inventory. We continue to see a significant opportunity set for new low-risk growth in our core footprint beyond the 2020 horizon.
We accomplished several important milestones in 2017, and we are well positioned heading into 2018 and beyond.
This new strategic update marks a distinct pivot in management's approach to the business. Over the next few years, Enbridge will spend much less on growth than it has in the past and will probably sell off some assets. Based on the company's strategic update back in December, it appears the assets most likely to get sold will be its renewable power assets in North America and its midstream businesses such as its interest in DCP Midstream and some other natural gas and natural gas liquids gathering and processing units. These businesses have been a thorn in Enbridge's side for a while and don't fit management's goal of going to 100% assets that are either regulated or utilities.
One notable thing in this most recent update was how little emphasis there was on distribution growth over the long haul. When the company announced the Spectra Energy merger over a year ago, management was touting that it would be able to grow its payout by 10% to 12% until 2024. Perhaps it will be able to still achieve that goal, but it will be harder to do if the company is selling some of its cash flow-generating assets and de-levering the balance sheet.