Enbridge Inc. (ENB) Earnings Call Transcript & Summary

All right. Good morning, everybody. It's Ben Pham, Managing Director of BMO Capital Markets. So I wanted to extend a warm well for everyone's attendance virtually with myself and Al Monaco, President and CEO Enbridge Inc., and we're here to discuss and help you pave a good road map for how Al and the team and the Board thinks about the ESG strategy and how they incorporate it into its business plans. And also in particular, how they plan to achieve that 2050 target of net-carbon neutral, which is, from our perspective, the gold standard that we're seeing out there, government companies are moving towards that path. Al, it's always good to see you in person, obviously, in this world we're in, but I'm always really looking forward to your comments, especially on such interesting topics, such as what we're going to talk about today.

Well, thanks for having me on Ben, and we appreciate it.

And everything is going okay over there? It seems like you're in office this morning and...

Yes.

And hope it's sunny over there in Calgary.

Yes, I've deemed myself essential, so I'm in the office.

Okay. And for those that may not know about this topic of ESG or maybe 20 years ago, it was called something else climate change or sustainability. I mean you -- Al you've put out your 19th report last year or so year. In some sense, you're ahead of the game here relative to some other folks that are just putting out plans themselves. And I think you've been living and breathing this dynamic for some time. Your pipelines are dealing [indiscernible]. Every day you're thinking about it, and it's, I think you've been [ growing ] it for some time.

So let's start the discussion a little bit. I've got a couple questions, and we'll have a bit of time and discussion and take questions from investors that are listening in or potential investors of Enbridge. Maybe I can start the conversation and talk about why ESG is -- why is it important to you? And what are the key messages that you would like to share with the audience this morning?

Okay. Well, yes, on that first point you made, actually about being involved in this for the last number of years in a couple of decades, it's kind of ironic in a way that everybody's focused on ESG today, but it's been part of what been doing for a very long time. I think big picture on your question here Ben, when you really get down to this, our business is about people trusting what we do, public trust. And so the way we look at ESG, it's almost like an all stakeholder measure of the public's trust from what we do. So it's a way of doing business as you pointed out earlier. And I have to say you can't achieve this overnight. We've always seen ESG as really an enabler, we call it, of not just how we operate, but in terms of executing our strategy. I think that's why we're a little bit ahead of the pack today on this. If you look at this and you're the expert, but from a capital market point of view, it really is table stakes today. And if you're not world class at ESG and the components that go into it, it's going to impact your cost of equity. And every investor class really has some form of screen over this. So the difference today is you can't hide because there are so many independent agencies, and you can say what you want about them, but they really do a detailed job of evaluating performance. So that's kind of the big picture here. On the E for us of ESG, it's about safety, environmental protection and now more recently, reducing emissions and having public targets. We invest in the safety side about $1 billion annually. That's a significant amount of capital to put to work. On the S, the way we look at that one is basically about how you engage communities, diversity and your social policy. So we've got a pretty diversified workforce today, about 30% women, 18% ethnic and racial, but we're bumped up the targets now to 40% in '20. The one thing that I would say is important here is what we call life cycle engagement for communities. So whereas you used to go in to a community when you wanted to build a project and then you're sort of off the right of way and you're gone. Now it's all about starting a law earlier with communities and going through the life cycle of the project with them. And then on the G side, this is a big focus for us, too. Board oversight and management accountability is what that means to us. So comp, the independence of the Board, of course, and then how you report on this. You refer to our sustainability report. So I think that's kind of the big picture of how we see this and the importance of it, Ben.

Okay. And maybe I'd just spend a bit of time looking to your 19th report to better [indiscernible] event. And correct me if I'm wrong, some targets you set a 35% reduction carbon emissions by 2030, carbon neutral by 2050 and that's carbon neutral by that time frame. Maybe address really what's the elephant in the room? Like what are the biggest sources of carbon emissions in your business today? And to some extent, you can flip that and think about what are the greatest opportunities for you in terms of reducing emissions and getting towards those targets.

Yes. Okay. Well, I think a bit of context here. It's a good question, is important, though, because I mean we're not a big competitor. If you look at the energy value chain, in general, we're about -- the midstream component is about 2%. But that doesn't mean we're not focused on this and leading on it, and we saw that with the setting of our targets here. We're split about -- in terms of our emissions and what we generate, probably evenly between liquids and gas. So on the gas side, it's essentially our compression for Scope 1. Those are Scope 1 emissions. And on Scope 2, it's essentially our liquids pumps. So what we need to do in terms of generating electricity in order to lower the pumps. So yes, I have to say, in terms of those targets, just for your audience here, that was sort of the easy part. Where we spend most of our time, though, was how we actually achieve the targets. So we came down to what we call pathways. So there's 4 ways to get to the numbers. Number one, modernizing our assets. Certainly, from an emissions point of view, so investing capital there. Technology is a big one. So think about predictive analytics and other sources of technology used today to reduce the volume and intensity of the power you're using. Another big one for us will be displacing grid power. And that's using solar facilities at our locations. So take a pump station or take, take a compression station and essentially putting some solar power in there because we control those sites. Buying lower carbon emitting sources through natural greening of the grid that we're seeing out there. And if we need to, if that's not enough, there's always natural offsets or buying credits. The biggest thing about this, Ben, is the model that we've created that essentially optimizes between those opportunities to reduce emissions. So you've got variables like, what's the price of carbon, how fast are things going to change in regulation, how much do you need to invest? How are you going to recover that capital? So we put that all into the model, and we're optimizing between those sources. Not to carry this on too long but there's also Scope 3 emissions. I talked about Scope 1 and 2. But the way we deal with Scope 3 is we've got renewables investments, hydrogen, RNG, which aren't actually offsets to Scope 1 and 2, but we're going to capture those and reports go through as well. So that's we look at that.

Okay. And what about evaluation and maybe just some event link to the governance? And as you report to investors, how do you plan to evaluate ESG performance versus your goals? I guess it's kind of like a report card that you're looking at or where the Boards' are looking at the end of the day. And then also linked to that, really, can you remind me, what about linking these goals, say, executive compensation, like what's the story around that?

Okay that last one is really important because, frankly, that's what's going to drive our performance and being accountable. So the first thing you need to do when we've got these broad targets, like you mentioned, the net zero in the 2030 target, you've got to embed those in the business. And so we naturally do that anyway because each business has annual scorecards. We call the balanced scorecard, which is basically operating and financial measures and a bunch of them within the scorecard. So we capture our targets around emissions and diversity in those scorecards and so that flows directly through to executive compensation. And in a way, then the scores you get on ESG around those agencies that evaluate you, it's -- to me, that's kind of reflected in your equity valuation. I think though another aspect of this today is the direct linkage that I think you're going to see between ESG performance and your cost of debt. And you may be aware that we have now had the first in our sector anyway, sustainability backed or linked to bank debt. And where the cost of funding there is tied to your ESG performance. So I think you're going to see that become more prevalent. And frankly, we like that additional scrutiny, if you will, or performance benchmarking and to make sure that we are tracking, too, our goals.

And I think it is a big signal to the market of linking these reductions to your compensation, the management team and where that's going. So that's good to see. Good to see that in your strategy. And maybe next talk about, perhaps, how do you ensure the easy targets or policies are reflected in your strategy or potential projects you look at? Like how do you make sure you, the management team, the Board is constantly thinking about this as you evolve here the next couple of decades?

Well, this is a great question because it's behind the scenes to your audience here and yourself. But it really is a key part of strategy. And I got to take it just a bit of -- a bit back here. This -- the strategy process here is essentially a year-long engagement between management and the Board. So we start the year with, okay, what's our current position, and we do this annually, by the way. So we're constantly putting it together. So current position, what's the environment around us? What are the fundamentals telling us? And what is our corporate risk assessment telling us are the big issues? We bring in some external people. So EV adoption, for example, we have somebody talk about that and supply and demand globally of energy. We try and do some high-level scenario planning based on that. So think about 5, 10 years out. And then each year, we'll course correct on strategy. I think it ends up, though -- the way comes out to you and the audience here, Ben, is the 3-year financial outlook, and we have a plan that sort of backs that up. But another critical element that we talk about with the Board is, okay, we've got strategies, but what's going to enable those strategies. So it's always been 3 things for us: talent management, so people; technology because that's extremely important to enabling your strategy; and ESG. And we've been using those 3 for at least a decade. And an illustration of how ESG has been on our minds for a very long time is really through a few actions. So if you go back and look at our asset mix over time, you've seen how it's sort of morphed here. We've got a lot more natural gas today, and we got fairly substantial renewables business. So in a real simple form, we're trying to align the asset mix of the company to the energy fundamentals we see out there globally. Another part of what spawn here, I think, from this strategy look and enablers is how we engage with indigenous groups. That's evolved. And then more recently, as we were talking about carbon pricing, that's probably more of the last 3 years that's developed. So basically, the Board and management go through this process annually. We do quarterly updates to see how we're coming along. And I think to go to the governance part, which I think you mentioned. So we'll have each Board committee oversee certain aspects of ESG. So we've got a corporate social responsibility committee who looks out for certain parts of it, safety and reliability, AFRC, the Audit Committee and then of course, governance. So each of these committees oversee their part of it. That's how -- that's how the governance framework and sort of the interaction with the Board works on this.

What -- it just seems myself, yourself, everyone else is working more now. And now we're followers with this ESG planning, it's good to see that. And maybe let's switch a little bit to the government policy. And maybe on the Canadian side, you've seen our prime minister, for those folks not [indiscernible] the Canadian side so much as a proposal for carbon taxes to go quite significantly, in fact, to $170 a ton by 2030, which I think is the most ambitious carbon tax out there in the world. And so correct me if I'm wrong on that really. Clearly, this is probably an increasing friction or cost to you assuming your carbon emissions stay the same here, Al. But how do you think about really impacting your cash flows, if this carbon taxes has actually pushed through? And what are some of the mitigants that you can utilize?

Well, okay, great question. And you're right, it's probably the most -- I don't know if you want to call it progressive or largest carbon levy globally that I can think of. But in any case, again, we're not a large emitter. And the other sort of ameliorating factor, mitigating factors only applies to Canadian operations. So probably 50%, 60% of what we do is in the U.S. I think the other mitigations generally though are the commercial model. In many cases, it's a small component of the tool but also pass-through to customers. So for example, on a fuel charge, that is applied to our utility customers in Ontario as one example. We currently -- I think if you look at the net amount, so roughly in a range of $25 million primarily in the liquids business. So it's a relatively small number for us in the bigger picture. It doesn't mean we're not focused on it, but it's a small component. I think I got to tell you, Ben, the bigger issue that I see in terms of carbon tax is what it means for the competitiveness of your industry. So it's critical that our progressiveness or the desire to imply carbon taxes doesn't disadvantage the industry. And the reason for that is there's countries, as you know, that don't have policies like that in place. So I think that needs to be incorporated on how governments think about this. And what we've heard so far, which I think is right is we got to have border adjustments to levelize these impacts for countries that don't have those policies. Otherwise, you're really putting your own industry in a tough spot. In a way, this is already accounted for in Article 6 of the climate accord, but that's been a little tougher to come together and actually be implemented. So that's how we see the impact on us, Ben.

Okay. And maybe switching to the U.S. and speaking with government policy and new President. You have a big U.S. business as well and an overall mix and with Biden's folks on climate change, what do you think, Al, are the opportunities and risk for you?

Well, overall, if you listen to the new President, he's been saying this for a while, his 4 pillars are jobs, diversity, COVID and a couple of other things that -- and climate, of course. So my overall observation, Ben, I'm not trying to sound like an expert on this, but if you're reacting to changes in the administration like this, every 4 years or 8 years, you really got to question your strategy. And I actually feel that we're in a pretty good position here. I mean, we deliver to the best markets, and those markets are not going away, as you've heard me say before. But more importantly, we're already part of this transition. I think we're really well positioned. But the bigger issue here, and this is maybe the most critical thing that we all got to get our heads around is the U.S., in particular, is dependent on conventional energy in any scenario. The fact is economies -- global economies or the U.S. economy are driven by affordable, reliable, secure energy. And it's critical, absolutely critical to the health and social wellbeing of how we live our lives here in North America. And the Texas emergency is probably an unfortunate but the most recent example. And the issue that I see with, particularly with deregulated markets like that one is, the reliability is not being priced in. And you really saw that, I think, come to the fore. So I think you asked, okay, what are the risks? I think, number one, it's building and expanding infrastructures a lot harder, as you very well know. That's going to hamper reliability. It's going to hamper the economic recovery and, of course, jobs. So I think business, as you'd expect, needs to have transparency before they invest capital. The opportunities, though, I think are really in front of us. So I mean, we're not seeing this yet, but the value of assets in the ground -- if you look at our map today, those assets cannot be replicated. So the strategic positioning of where your assets go to those key markets is a big driver, I think, of that increase that you're going to see. We've got, luckily, many opportunities to expand the existing assets. So greenfield projects are harder to do or not likely to be done for a bunch of reasons. So I think it helps to have assets that spawn these opportunities. Natural gas, this is probably the biggest point here. It really enables, in many ways, renewables growth because of the way it falls, load and can really form baseload power. The other opportunity, if you've been covering in the Permian, certainly, Canadian heavy oil is going to be even more important to U.S. refiners going forward. So I think those are the opportunities and along with being, what I'll call at the forefront of technology, I mean we've been investing in renewables for 20 -- over 20 years. Our existing infrastructure is really going to support the hydrogen economy. People forget that transportation and infrastructure is going to make hydrogen go around ultimately. And I think you've seen us move quite aggressively into renewable natural gas. So that's how I look at that issue.

I mean it's an interesting topic or comments that you mentioned, Al, really when you think about scale on the ground. And you're right, like it's just so hard to build new infrastructure in this marketplace. And you look at your footprint, North America looks well positioned to benefit for any sort of expansion needs going forward. And I think we always take for granted the need for energy really -- we only complain when the lights are down or running out of gas. And I looked at pictures in Texas, folks burning couches to stay warm. I mean it's incredible, really the dependency we have on infrastructure and then how you guys can connect to that. And you look at even -- here in [indiscernible] it's Enbridge connect energy, that's energy transition, right? I want to insert a question from the audience because we're staying with the U.S. I'm just going to read it all verbatim here. How did Enbridge fare with the recent cold weather event in the U.S.?

The natural gas -- that's a great question. The natural gas transmission assets actually performed extremely well. We had basically no hookups. And I'm not going to -- or hold ups at all. I'm not going to say it was easy. Obviously, with the power down in buildings and back-up power going down, we had to maneuver, let's call it, in order to keep the gas control business or business center running full time, but we've got contingencies for that kind of thing. So generally, that worked extremely well. We've got a couple of wind farms there, which obviously froze up for a little while. But we got back up pretty quick. The team did a good job. So I think overall, we fared pretty well. On the oil side, we had to turn down volumes simply because we didn't have power. We did a little bit of that on the Seaway system and a little bit of that on Flanagan but it got backup right away. So we don't expect a huge impact from all of that.

Okay. So I know for the longest time, it would just seem there's a lot ongoing debate around oil. Peak oil and we've gone through that. I wonder we've been talking a lot to investment [indiscernible] is on the gas side and durability of gas demand long term. You got this interesting gas utility in Ontario, which you were -- where I live. And as I mentioned before this, we had our heat on [indiscernible] all year even during the summertime. So we're also reliant on Enbridge Gas. But Al, what do you think about the thought process here with some pundits who talk about banning gas to home? And how do you think about the long-term durability of your gas utility?

Well, Ben, let me put it this way. And I guess, maybe we have to say this but I feel infinity to the utility because I ran it for a while. It's a crown jewel asset for us. It's the largest and fastest-growing gas utility in North America by a margin. And I can just tell you, many would love to own this business. I guess maybe to your question though, I think it goes to this notion of banning gas hook ups that's being talked about frequently. And I understand it and as you heard earlier, we're very focused on emissions, issues and climate and so forth, and we have a renewables business. But I think this tends to be politically popular but comes with risks and challenges that really need to be taken seriously. I mean, I think in Ontario, this has actually been a pretty good test case for us and because we've talked -- we've been talking about that kind of scenario shutting down gas for as long as I can remember. But the harsh realities are this. Natural gas is the most reliable and lowest cost energy source, whether it's heating, cooking and it's about 60% cheaper. So let's start with that one. If you look at manufacturing and pet chem industry, they are -- it's the most cost-effective and reliable there. The infrastructure is in the ground, and it's essentially paid for, whether you look at the storage, the distribution and the long-haul type that gets the gas there. So replacing a system like that in a congested area like [indiscernible], for example, is just unfathomable. But the one that always -- I think of is -- Texas is again was a good example. If you were to replace the peaking capability of natural gas with electricity, you would need 80,000 gigawatts, which is roughly 2x, 3x the amount in Ontario today. So that's how I look at this. But I will say that natural gas supporting our renewables targets, I think, can also be quite a strong lever. So that's how we assess that. I would say how people should look at this is give natural gas a fair shake on reducing emissions. It's been the major contributor to lowering emissions in the United States. Again, it works really well with renewables. It's going to be part of the RNG solution. Conservation has been a big impact in our own business. And of course, LNG and if you look at how LNG can be created in North America with low emissions, standards being applied, it can really be a source of reducing global emissions. So sorry for the long answer but that's the way we look at it.

No. I think it's definitely worth discussing it in a bit more detail. It's something that, I think, at least my conversations, there's been some modest concern about -- and we had capital markets professionals, and I'm always flattered to hear that you're considering me an expert from your earlier commentary on the market. The base is going to continue but maybe let's go back to oil for a second here. And there's some pretty scary figures coming out from EP or [ ESPs ], energy agencies around where oil could go in 2050. I think there's one scenario where oil is going to drop 80% from today. I'm not asking around what your views on that specifically, but I think it is worth going back to your Investor Day. You had some pretty interesting charts around, let's just assume, North American demand does drop, that's -- 50 is probably realistic narrow, but you have emerging markets, the middle class emerging, they're going to want to fly. I think it's a very logical outcome of what we're going to see. So when you think about your footprint in the Canadian oil sands and how do you think about your positioning to benefit from that exportation? And is there anything you need to do strategically to lever yourself to that longer-term dynamic?

Well, I think you're right to point this out. There's no -- I don't think there's any argument that North American demand is going to turn down. But as you're pointing out, global energy demand is going nowhere but up. We know why, population growth, growth in the middle class, greater urbanization. I don't think anybody is really arguing that energy is going to grow by roughly 20%, 25% by 2040, depending who you listen to. But again, the reality is that our economies are driven by low cost, reliable energy. And if you look at any of the scenarios, including the most drastic in terms of carbon legislation, which would still need a lot for that to actually happen. It's very clear that all sources of energy are going to be required. As we keep saying, it's going to take a long time for that equation to change materially. So natural gas is going to play an even larger role by 2040. Crude oil. I think you're right, probably tapers off in North America but globally, it still grows. I think fundamentally, the biggest change to get to your point and how it affects us. Commodities have transitioned now to global connectivity. We know that developing economy energy demand is growing substantially. It will continue to do that. And oil and gas supply growth over that same period, though, for U.S., Canada and OPEC has gotten even better. If you look at all of the fundamentals on this, it's pretty clear that North America has got this great advantage. So you got global growth in energy, and you got North America who's in an ideal position to supply that energy at a very low cost. We've got the technology, infrastructure and resources. So what we're doing essentially is trying to point our infrastructure more and more to export markets. And you saw -- I mean, we did this probably, I guess, now 10, 15 years ago, pointing those oil sands barrels to the Gulf Coast. That's where heavy oil refining capability is located, and they're the most competitive globally maybe aside from 1 or 2 areas. The infrastructure we've got along the Gulf Coast for natural gas is extremely well positioned to feed LNG and then, of course, export gas into Mexico. So I think for us, the export strategy, if you want to call it that, has been developing for a long time. And I think that's where the future is for the industry in terms of gaining global market share and our opportunity to be a big part of that.