Enbridge Inc. (ENB) Earnings Call Transcript & Summary

So thank you, everyone, for joining us this morning. We're very excited to be joined by Al Monaco, CEO of Enbridge, having served since 2012 through a period of enormous growth at Enbridge and transformation. So congratulations on all the progress. We're going to have a fireside chat presentation, walk through different aspects of the story, and we'll just kick right into questions here. And Al, thank you for joining us.

Sounds good. Thanks for having us.

At the Analyst Day, I thought Enbridge said some really interesting remarks as it relates to ESG, and it's important to get the pace of energy transition correct when thinking about investments. And so I was wondering if you could touch on that a bit, what were you thinking there. And as well, Enbridge really stands out versus midstream peers, if you will, looking at those, given the existing renewables platform. And so just wondering what advantages that provides.

Okay. Well, it's a good question on how you make sure you get the transition right. Reason being, of course, as you know, we put -- we got a lot of capital in the ground, and we put a lot of capital to work. So we've got to make sure we get it right. And I don't think there's much disagreement that the transition will happen. The question is what's the right pace. So for us, we look at signposts, basically, that we track very carefully. The degree of policy change that we're seeing from governments is a big one, degree of adoption, EVs and other things like that. So we put all that into the hopper, and we make a call on how fast things are going. But I think the key thing is at Enbridge Day, as you recall, we laid out essentially what is a two-pronged strategy. And the first part of that is to continue to invest in conventional assets. We think there's a long runway for conventional assets, and the last probably 3, 4 months have demonstrated why we got to get this right because things change quickly. And if anything, our view is that the conventional runway has been extended even further. The other part of the strategy, of course, is to be slightly ahead of the curve, if you will, on low-carbon investments. And whether that's RNG, hydrogen, carbon capture. And the link between the 2 here is our current assets are going to be absolutely critical to that transition, whether you're thinking of any of those 3, it's about transportation and storage. So I really think that being disciplined about the pace is critical. And again, given recent events, I think the two-pronged strategy that we've got, I think, is playing out exactly as we intended. You mentioned renewables. It is a differentiator, I think, in our sector. We started renewables probably, well, it's over 20 years ago now. And we built it like we typically do things, slow disciplined way, got some great assets to start with and built it up slowly over time. I think the important thing for us was building the skills and capabilities. So we started out new in that area, but certainly, development skills, operating skills, execution skills, which have to be built over time. So I think we're in very good shape there. We've now parlayed this. And this is one of the things about strategy is that if you can build optionality into your business by doing things in a disciplined way, they pay off. And we didn't anticipate this paying off in this way, but we're now deploying that expertise to the rest of our business. We have a net 0 commitment. We use a lot of power in our business, whether it's transmission of gas or liquids pipelines in pumps that we're using on-site solar facilities now. So we're kind of parlaying that ability into the other part of our business. So the transition is important that we get right, and I think we've got the right balance.

Got it. That makes sense. And maybe just pivoting towards capital allocation, something that's been topical in the space for some time. On the first quarter call, Enbridge reiterated the capital allocation philosophy. There's been a touch of volatility in the market recently. So just curious if you could update us there with regards to thoughts on CapEx versus buybacks and just capital allocation in general?

I'd have to say the discipline, again, is really important. And there hasn't really been a change in how we're looking at it. Even though, certainly, you'd have to say over the last 3 or 4 months, the fact of the matter is that energy securities, everybody knows here, is kind of ramped back up to the top of the list, along with affordability and reliability. So that's a big change in the dynamic. I do feel that this has been a real inflection point in energy markets. Any way you look at it, if the war would end tomorrow, even if that happened, we are going to see a permanent change here in terms of how people look at energy security going forward. In terms of allocation, though, as I said, no real change here. Number one priority is to make sure the balance sheet is in great shape. We're very happy that we're down sort of at the bottom of our target range of 4.5% to 5%. We've done a decent job of that, and I think that's the major priority. Number two, continue to grow the dividend. And that's important for us as part of our value proposition. And then, of course, in order to grow in the future, continue to invest capital and where it makes sense and focused on return on and of capital in the conventional projects. And perhaps later on in the decade, you'll see a ramp-up in lower carbon. So those are the key attributes of capital allocation now. In addition to those opportunities, we compare everything we do to buying back shares, certainly, retaining capacity for future opportunities. So continuing to keep our debt low and perhaps even going below the range is a possibility. Asset M&A, where we see good opportunities, we'll pluck those off. We did something like that when we bought Ingleside. It was a sizable opportunity at around $4 billion, and we decided to go after it. It really fit extremely well in terms of the strategy we wanted to play out on exports. And if you look at that now in combination with our LNG capability and opportunity set, which I'm sure we'll get into, we are really well positioned from an export infrastructure point of view. And the future, given where especially the last 3 or 4 months have gone, is going to be in exports of North American energy.

Got it. That makes sense. That's helpful. And I just wanted to dive in a little bit deeper when it comes to the capital expenditures. And when you think about traditional midstream versus energy transition projects, how do you evaluate those 2? Are the parameters the same? Any differences there? Just wondering your thoughts.

Straight up, same way. We go through the same, I'll call it, pedantic critical investment criteria that we traditionally do whether -- well, any kind of project, whether it's conventional or low carbon. And it's very important that you build up your true hurdle rate for each and every project and evaluate them consistently. Now in terms of the lower carbon front or the net 0 angle, let's say, in some respects, a key to that is making sure that you're building in the cost into your financial models and your capital investment opportunity outlook to ensure that you captured what is the reality today. So we've got to have net 0. So any project that we do will have to ensure that we're building in capital or up-cost in order to achieve that goal. And so we're very disciplined around that opportunity.

Got it. That makes sense.

And a good example of this is actually Ingleside getting back to that one. When we went into that, not only were we able to include solar capability on that site, the site uses about 6 megawatts. We're building a 60-megawatt solar farm on-site, so we'll be able to sell the rest of the power into the grid. But we looked at the transition scenarios that could play out. We're buying a long-term asset, 20, 30, 40-year life. So you want to test that against transition scenarios if things go faster or slower and lower carbon. What we concluded, in terms of the capital investment review, is that in any scenario we could come up with a reasonable scenario that it was going to be around for a very long time. Why is that? Great competitive position in terms of where it's located, access to water, the cost from the basin to the terminal and then for the terminal itself, very competitive, moves about 20% of the U.S. exports right now for crude oil. So you've got to determine whether or not the asset is going to be able to withstand changes, and we concluded very, very strongly that be around for a very long time. So evaluating in your capital investment model, where things may go and testing the resiliency is important.

Got it. That makes sense. And then coming back to the natural gas pipelines, as you touched on a little bit earlier, just wondering if you could update us with regards to the opportunity set you see there across your platform. But really, specifically, U.S. Gulf Coast, LNG exports, potentially West Coast Canada exports, how is Enbridge positioned there?

Okay. Well, getting back to what we said earlier about what's happened in the last 3 to 4 months, and it's very clear that -- we were pretty certain about the opportunity set for natural gas to start with. It's what actually led to our acquisition of Spectra back in 2016. But you'd have to agree that it's even more positive today for the natural gas story, particularly given what Europe has done around repower, given what it said about natural gas in terms of its taxonomy, and how it's a sustainable fuel going forward. We're pretty excited about it, and we've got a great position to capitalize on. In terms of the opportunity set, maybe the thing to do is to talk about it in 2 general terms. On the Gulf Coast, we've got the Texas Eastern system, as you know, Jeremy, with kind of like, call it, an east to west header system all the way from Louisiana down to Brownsville in Texas. We feed 4 LNG facilities today, and that's been because of our position and our low-cost ability to access these facilities. Now the bigger story, I think, given recent events is the fact that we've secured 2 additional projects to feed new LNG plants once those get FID-ed next decade, of course, is a big one. And of course, Texas LNG is there as well. So in both cases, we're in really good position to feed those once they get FID-ed, and it's more positive today than it has been even over the last year. So looking forward to that, there's probably a couple of billion dollars there, Jeremy, of opportunity in terms of capital deployment in the not-too-distant future. And as I said, they're locked in. We've won that business, and we're waiting for FIDs.

Got it.

On the West Coast, think of it the same way, except it's a north-south header system in our West Coast transmission business. And obviously, Western Canada, behind the Gulf Coast in terms of LNG development, but we think it's coming. But regardless of that, we have a new expansion opportunity, T-North, which is roughly $1 billion, which is more addressing sort of the local egress challenges, let's call it that, in that part of the world. And then we've got wood fiber, which is getting close to FID, which is a smaller LNG project, but certainly a good one, particularly given it's got great First Nation support. And so there's probably -- if that one goes, there's probably another couple of billion dollars of expansion on our T cell system. So good opportunity set on LNG roughly is probably totals up to about $6 billion in opportunity here. And again, it really reflects the power of having pipe in the ground, the power of having optionality to provide low-cost service to new ventures like LNG.

Got it. Makes sense. And pivoting to gas, to oil, the mainline volumes really proved resilient throughout the pandemic. And I was wondering if you could touch on the drivers there. And I guess we're all curious with oil and gas prices where they are, I think almost everything in North America is economic to produce. So when do you expect, I guess, the supply response to come through?

On Western Canada?

Yes.

Yes. Well, first of all, in terms of the resilience of this, this is a great point you raised because if you go back to the COVID situation, we were running just about full and that's because the refineries that we deliver into are the most globally competitive. And so their margins were high enough to sustain even lower prices at the time. And so we were running just about full. So that's a big part of our resilience is the markets we deliver into in the refineries. Another part of the resilience is the basin itself. It's been around for a long time and will be for a very long time still -- and the producers there have done a tremendous job in terms of getting their cost structure down. You're looking at about $30 per barrel cash cost. If you look at full-cycle costs in Western Canada, roughly $55 to $60. So point being, I think you're going to see the oil sands around for a very long time, particularly again, given the discussion we had earlier about where we are in terms of global energy. Does that -- get back to your other part of the question.

It was just mainline resiliency and you talked about the supply response. So I think you touched on those, Western Canada being very resilient there. But maybe kind of continue with mainline here. Obviously, a big question with regards to CTS versus cost of service or what path is going forward here. Could you update us on that in what would each path mean, I guess, as far as investments or Enbridge's strategy?

Okay. Well, let's start with where we're at with our discussions with our customers. So I think it's pretty clear that from what we've heard so far, they would prefer to stay in a cost of sort of a CTS or an incentive rate-making, which we've been in pretty much now for the last 3 decades. And the reason that's the case is it creates a huge amount of alignment between us. And so over the last decade, we've had this recent version. We've added 1 million barrels a day of capacity, very low cost, which has really helped our shippers and really sort of improve the netbacks overall out of the basin. So we're incented to do that. We're incented to manage all the things that they don't want to manage, frankly, power costs, interest rates, foreign exchange, integrity management. Those are all things that we manage under this agreement. And for that, we get a commensurate return. The other form of agreement here, if those discussions are not fruitful, would be cost of service. And honestly, we're a little bit -- I won't say agnostic, but we could certainly go the cost of service route here, in that they take on all of those risks that I was mentioning. The discussions, I think, have gone well so far. There's a lot of information exchange between us and our customers to make sure they transparently understand what our return has been in the past. They understand all of those components and variables that I've talked about, which is important that they get. And we shared with them how we see the future unfolding. So I think it's probably too early to tell which one of those we end up in, but good discussions so far. And we should hopefully have a decision as to which route to go to file probably in the summer. In terms of the capital investment. I'd say the CTS, as I was alluding to earlier, form is probably more conducive, in that we're incentive to optimize, incrementally expand and -- and as I said, that would be aligned with what they want to do. And so in that situation, you've got a toll that's essentially supporting return on capital and new investment. In a cost of service, you're, again, recovering on the additional capital in a conventional mechanism, which essentially would result in higher tolls. So that's another reason why I think they're probably preferring the CTS arrangement. Hopefully, that answers your question.

Yes. So this summer, we'll get some resolution here or...

Well, at least on which way we're headed. So the discussions are good right now. A lot of back and forth, and it takes time for them to make their assessment. And remember, this is a collective group of a lot of shippers. So there's different points of view, and we'll see where it works out.

Got it. We eagerly await. Maybe pivoting towards CCS here, if we could. Enbridge was recently awarded a hub by Alberta here. Just wondering if you could talk through your strategy on CCS with this hub, who current customers are, who could customers be in the future? Just curious on that.

Okay. Well, I must say this is a real gem of a project. And our 2 anchor partners right now are Capital Power and Lehigh cement. So interesting, not conventional oil sands players. So I think that's the first part of it. This -- if you look at the entire Wabamun region, there's probably 20 megatons of CO2 that is up for capture, not just from those 2, I think those 2 contribute roughly 4 megatons, which would actually be one of the largest projects in the world on its own. So having a big area like that if you can get an anchor customer or 2, which we think we have, then scaling up beyond that would really be helpful in terms of reducing the overall cost. We were successful in being selected by the Alberta government in this first round, which was a good surprise for us, and we're working a way to now determine whether the poor space is going to be viable. And so it's kind of a technical review at this point. And once we do that, if it passes the test, then we'll be awarded port space by the government. So great opportunity. In terms of how we would approach this business model-wise, I think the key to this, everybody's got to remember that this is a cost to industry, whether it's power companies, cement companies or oil sands developers, capturing carbon is a cost. So where we come in, expertise-wise is transportation and storage and bringing a utility investment model, I can call it that, whereby we bring our low-cost capital to bear. And we essentially -- it's almost like any other project we do, instead of bringing production, they're bringing CO2, and if they can commit to deliver CO2 and they can get comfortable with the commercial underpinning of that, and we get comfortable, then we've got almost a utility-like business, I think. And that I think works well from their perspective because it will result in the lowest cost. And having existing infrastructure, of course, is very important in us and that will help.

Got it. That's helpful. And then maybe pivoting back towards Ingleside and it really seems like Ingleside is quite the Swiss Army knife of opportunities. And so I'm wondering if you could touch on the low-carbon opportunity set there at Ingleside.

Well, you're probably right, that's a good descriptor. We thought maybe there was 1 or 2 slivers or knives in the pocket, but it's a full set for sure as we get more into it. The core of that business, of course, is going to be oil exports, great customers there, and we have a very positive view of oil exports going forward. But on the low carbon front, this is where optionality comes in again because recent events have really prompted a whole new set of opportunities. And there's probably a couple of new things that could come up. Certainly, NGL exports is one of them. This is a very large site. There's about 500 extra acres of room, again, situated in an ideal position on the coast there to open-access water. So that is one element of it. The bigger news recently is something we came up with Humble, Humble Oil, who have joined us in an opportunity here. And basically, think of it as a full value chain low-carbon opportunity. So if you work from the back end where you're potentially producing hydrogen at the site and exporting ammonia, that is a big potential for this site going forward, working with Humble. But if you work back the source of that, being a blue hydrogen opportunity, is natural gas. And Texas Eastern just happens to be sitting right alongside Ingleside. And of course, with that comes carbon capture. This whole region is very sound technically from a port space perspective, actually onshore or offshore. So think of natural gas carbon capture all the way through exporting of ammonia and moving hydrogen and being -- producing hydrogen on site. So it's pretty exciting.

Got it. I'm going to keep running with that Swiss Army knife analogy.

Okay.

But maybe pivoting to offshore wind, Enbridge is unique versus other midstream peers, having a very established position here, particularly in Europe. Just wondering if you could update us on your thoughts there with regards to how big could this opportunity set be over time, knowing that there's more competition today than there was in the past and industry has not stood up in North America yet. So curious to your thoughts.

Yes. So maybe just a little bit of background here. We've got 3 offshore operating projects, right now, 1 in the U.K. and 2 in offshore Germany. And as I said earlier, we've kind of begun this a number of years ago. We've got 4 projects now actually in construction, 3 offshore West Coast of France and 1 on the southern coast of France. And these all are predicted to come into service sort of between end of this year and 2024. So it's good cash flow coming our way in the next few years here, and construction is going fairly well right now. I think in terms of the opportunity set, this is another area of discipline that you got to maintain. We've participated honestly, Jeremy, in a lot of auctions as of the last couple of years, and it's to say the least, very frothy, whether you're talking about a new development or existing assets. Now valuations have come down. So that presents an opportunity going forward. But we've been very careful not to overpay or be overzealous here. We've got enough going with those projects that I referred to, couple more actually in development in Dunkirk, and then expansion of an existing facility that we really don't need to stretch here, while we're in this frothiness market and, of course, supply chain issues and so forth. So we're in good shape right now. The big opportunity in the next horizon in this space is floating offshore wind. And that's the South France one that I mentioned. And if that is proven out, we're just doing a pilot project right now. If that's proven out, we've got roughly 750 megawatts with our partner, EDF, that we can develop. And of course, that will be promulgated throughout Europe, I think if it's proven out, which the technology here is really not anything Earth-shattering. It's been done for ages in oil and gas. And so a big opportunity there, too. But I think we need to keep our discipline.

Got it. That makes sense. Discipline is obviously very important here. Maybe kind of pivoting towards hydrogen a bit here. If you could update us on the Markham blending project there. And just what do you think about the time line for hydrogen? When this could make sense or be more meaningful opportunity?

This is -- going back to what we were saying, this is a good example of being ahead of the curve. I mean, we were into this back in 2016, '17 with design. And this is actually a green hydrogen facility. So for everybody in the room, Essentially, what we're doing is taking off-peak wind and solar power from the grid, so power that would go otherwise lost, capturing it and essentially converting it through electrolysis into hydrogen. So we've sort of done that phase, proved that out. And the latest phase, which we started a few months ago in operation is essentially taking that hydrogen and blending it into our gas distribution system, and it's only 2% to start with. But think of this as a green hydrogen stream ending up in the franchise through our distribution system. And if you think about our 2 Tcf per year of send-out, the opportunity here even at 2% is large. And so if we can prove this out, which I think it looks like we will, it's a big opportunity going forward. So that's sort of on the gas distribution side with green hydrogen. There's a whole bunch of work going on, I think, as everyone knows on the transmission side. That will probably take a little longer to prove out. But if you can imagine, again, the thousands of miles of pipe that we have and the fact that hydrogen will need to be transported distance-wise. And I think again, good opportunity longer term. And it's part of the transition. So again, to come back to what I said earlier, being able to use existing infrastructure and parlaying that into low carbon opportunities and investments is going to be great for us.

Got it. Makes sense. I think we're down to our last minute or so. So I don't know if there's any...

Already?

Time flies when you're having fun. But I don't know if there's any kind of final thoughts that you want to share with the audience, the things that we didn't touch on that we should have.

Yes. I think we captured -- I mean, the one thing that really sticks out to us is how the -- there's been an exponential increase here in the natural gas opportunity set. And yes, it's LNG. But more generally, we're just really excited about what's next for natural gas. It's very clear to us anyway that you just need to look at Europe as one example. You're going to need more diversity of supply sources, and you're going to need a sheer amount, larger amount of energy generally, and gas is going to be a very critical part of that any way you look at it. So having half of our assets in natural gas and having a real good opportunity set that is already in progress. I think we're pretty excited about that.

Great. Well, we're excited to see everything that is going to unfold here. And thank you very much for taking the time today. Thank you all for joining us.

Okay. Thank you.