Enbridge Inc

Investment Brief
May 19, 2022
Investment Focus
ENB-TSX | ENB-NYSE
ENB’s Gulf Coast strategy
Price: $57.02
Accountability Research Corporation – Investment Brief

gained significant momentum

Target: $64.00 with the acquisition of Moda
Expected Return: 12% Midstream during the quarter.
BUY Underpinned by ~$10 billion of
projects placed into service in
Earnings 2021, the company is
Quality: Average projecting ~9% y/y growth in
adjusted EBITDA and ~8% y/y
Quality of fit: 15 / 25 growth in DCF/share. Through
Completeness: 17 / 25 2024, ENB expects DCF/share to increase at a CAGR of 5%-
Appropriateness: 17 / 25 7% and dividend growth to be similar. Additionally, the company
Management: 16 / 25 has identified several multi-billion dollar projects that are likely
Total: 65 / 100 to fuel its growth over the long-term. We reiterate our Buy rating
and increase our price target to $64.00/share.
Dividend Yield: 6.0%
Market Cap: $116 billion Investment Highlights
Shares Out: 2.03 billion
Avg. Volume: 15.6 million 1Q22 Financial Review. ENB’s performance during the quarter
2022E Rev: $51.9 billion was broadly in line with our expectations. The company
2023E Rev: $53.2 billion continues to benefit from the strong recovery in demand for
2022E EPS: $2.99 hydrocarbons and volumes of 3.00 MMbbl/d on the Mainline
2023E EPS: $3.15 system slightly exceeded the annual guidance of ~2.95
MMbbl/d. On a y/y basis, volumes on the Mainline system
increased 9.4% in 1Q22. Adjusted earnings of $0.84/share
Enbridge provides energy increased from $0.81/share in 1Q21 and just missed our
transportation, distribution, and
estimate of $0.85/share. Adjusted EBITDA of $4.15 billion in
related services in North America
and internationally. The Company
1Q22 increased from $3.74 billion in 1Q21, while distributable
operates a crude oil and liquids cash flow (DCF) increased to $3.07 billion ($1.52/share) from
pipeline system, and is involved in $2.76 billion ($1.37/share).
natural gas transmission as well as New Project Secured. Underpinned by growing demand for
renewable energy. midstream services, ENB sanctioned the $0.3 billion expansion
of Panhandle Regional Transmission system. The company
also announced open season to support a 400 MMcf/d
expansion ($1.0 billion estimated cost) of BC Pipeline’s T-North
section, and continues to advance the $2.5 billion T-South
Harshit Gupta, MBA expansion.
hgupta@accountabilityresearch.com
Reaffirmed 2022 Guidance. ENB reiterated its 2022 adjusted
Mark Rosen, MBA, CFA, CFE EBITDA guidance of $15.0-$15.6 billion, which at the mid-point
mrosen@accountabilityresearch.com implies ~9% y/y growth. DCF/share is estimated between $5.20
and $5.50.
Valuation. We maintain our Buy rating and increase our price
target to $64.00/share, which corresponds to a 2022E
EV/EBITDA multiple of ~14x.

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ARC Investment Brief – Enbridge Inc.

Investment Highlights
This is only an Investment Brief. Please refer to our Full Report for additional information.

ENB’s Gulf Coast strategy gained significant momentum with the acquisition of Moda Midstream
during the quarter. Underpinned by ~$10 billion of projects placed into service in 2021, the company
is projecting ~9% y/y growth in adjusted EBITDA and ~8% y/y growth in DCF/share. Through 2024,
ENB expects DCF/share to increase at a CAGR of 5%-7% and dividend growth to be similar.
Additionally, the company has identified several multi-billion dollar projects that are likely to fuel its
growth over the long-term. We reiterate our Buy rating and increase our price target to
$64.00/share, which corresponds to ~14x 2022E EV/EBITDA.

1Q22 Financial Review

ENB reported total revenues of $15.1 billion in 1Q22, up 24.4% y/y from $12.1 billion in 1Q21.
Adjusted earnings of $0.84/share increased from $0.81/share in 1Q21 and just missed our estimate
of $0.85/share. Adjusted EBITDA of $4.15 billion in 1Q22 increased from $3.74 billion in the prior
year quarter. Assets placed into service, the Ingleside acquisition, strong recovery in Mainline
volumes and full Line 3 surcharge of US$0.94 vs. interim surcharge of US$0.20 in 1Q21 were the
primary drivers of adjusted EBITDA growth during the quarter. The Energy Services segment
continued to report an adjusted loss before interest, taxes and depreciation of $71 million in 1Q22
vs. a loss of $75 million in 1Q21. Distributable cash flow (DCF) increased to $3.07 billion
($1.52/share) from $2.76 billion ($1.37/share).

The recovery in commodity markets supported an increase in average deliveries on ENB’s Liquids
Pipelines. Volumes on the Mainline system, which includes the Canadian Mainline and the
Lakehead System, increased to 3,004 Mbbl/d in 1Q22 from 2,746 Mbbl/d in the prior year quarter.
Deliveries on the Mainline system slightly exceeded the company’s annual guidance of ~2.95
MMbbl/d. While ENB did not report volumes on the Regional Oil Sands system this quarter, we
expect the volumes rose y/y as Oil Sands production increased amid rising commodity prices. This
was further supported by an increase in adjusted EBITDA contribution from the Gulf Coast and Mid-
Continent System of US$274 million in 1Q22 vs. US$149 million in 1Q21. The increase in adjusted
EBITDA was mainly due to the acquisition of Ingleside Energy Center in 4Q21. As such, the Liquids
Pipelines segment reported adjusted EBITDA of $2,217 million in 1Q22, up from $1,881 million in
1Q21.

Looking ahead, we continue to expect the Liquids Pipelines segment’s performance to improve.
Backed by strong demand for heavy oil, ENB reiterated its average Mainline deliveries guidance of
~2.95 MMbbl/d in 2022. The company noted that upstream maintenance during 2Q and 3Q are
likely to affect volumes, which are expected to be lower than the annual guidance range in those
quarters. Furthermore, ENB’s strategy to position its business to facilitate crude oil export from
North America (mainly from the US Gulf Coast) to Asia is expected to positively impact volumes on
its pipeline systems. In 1Q22, the company completed the acquisition of Moda Midstream, which
includes the Ingleside Energy Center that constitutes over 20% of total US Gulf Coast crude oil
exports. We highlight that the company’s 15 MMbbl Enbridge Houston Oil Terminal (EHOT) and 2
MMbbl Seaport Oil Terminal (SPOT) are under development, which are likely to further augment its
export capacity.

The Gas Transmission and Midstream segment reported adjusted EBITDA of $1,058 million in
1Q22, up from $1,007 million in 1Q21 primarily due to the strong contribution from US Midstream
on account of an increase in commodity prices that continued to benefit the Aux Sable (42.7%
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ARC Investment Brief – Enbridge Inc.

ownership) and DCP Midstream (28.3% ownership) ventures. The US Midstream business reported
adjusted EBITDA of $89 million in 1Q22, up from $43 million in 1Q21. Furthermore, contribution
from the T-South expansion and Spruce Ridge projects that were fully placed into service in 4Q21
resulted in an increase in Canadian Gas Transmission adjusted EBITDA to $177 million from $142
million in the prior year quarter. However, the timing of operating expenses led to a decline in US
Gas Transmission adjusted EBITDA to $759 million (US$599 million) from $782 million (US$618
million). Operating maintenance and other expenses rose to US$324 million from US$261 million in
the prior year quarter. The CAD/USD forex rate of 1.27 was unchanged from the prior period.

Gas Distribution and Storage segment adjusted EBITDA increased to $674 million in 1Q22 from
$646 million in 1Q21. While gas distribution revenues surged to $2,098 million in 1Q22 from $1,534
million in 1Q21 due to growth in rates and customer base, operating and administrative costs for the
segment increased to $299 million from $272 million during the same period. The segment did not
report any income from equity investments in 1Q22 vs. income of $22 million in the prior year
quarter due to the sale of the minority interest in Noverco in December 2021. Actual heating degree
days increased to 2,028 in 1Q22 from 1,807 in 1Q21 due to colder weather during the quarter. Gas
volumes jumped to 816 billion cubic feet (Bcf) from 671 Bcf during the same period last year. The
company noted that it expects to add over 40,000 customers in 2022.

New/Potential Projects
Underpinned by growing demand for midstream services, ENB sanctioned the $0.3 billion
expansion of Panhandle Regional Transmission system to cater to growing natural gas demand in
southern Ontario. With targeted commencement of operations in two phases in late 2023 and late
2024, the expansion is likely to provide 203 terajoules per day (TJ/d) of additional capacity and is
expected to receive a full cost of service (COS) regulated return. The company also announced
open season to support the 400 MMcf/d expansion of BC Pipeline’s T-North section, which includes
pipeline looping, compressor unit additions, and station modifications. With an estimated cost of
$1.0 billion and expected commencement of commercial operations in 2026, the expansion is likely
to receive a full COS regulated return. Additionally, ENB continues to advance the $2.5 billion T-
South expansion of the BC Pipeline which is expected to add about 300 MMcf/d of capacity and
commence commercial operations in 2027. The company expects to announce open season for the
same in 3Q22. However, the expansion is dependant on the Woodfibre LNG project. In April 2022,
privately-owned Woodfibre issued a notice to proceed to its contractor for pre-construction work.
The Woodfibre terminal is expected to have an annual export capacity of 2.1 million tonnes of LNG
targeting Asian markets. ENB also has long-term optionality to benefit from potential exports of LNG
from the west coast, with plans for Pacific Trail Pipeline (PTP) and Westcoast Connector Gas
Transmission (WCGT) which would supply Cedar LNG and Prince Rupert, respectively. While new
pipelines face significant uncertainty due to the stiff regulatory environment, we note that PTP has a
fully permitted right of way.

In low-carbon projects, ENB was awarded the right to develop Open Access Wabamun Carbon
Hub, which is expected to capture up to four megatons of CO2 annually and is a step toward
achieving net zero emission targets. ENB has signed a memorandum of understanding (MOU) with
Capital Power and Lehigh Cement and the hub is poised to benefit from investment tax credits of
50% on capture equipment and 37.5% on transportation and storage announced in the federal
budget. Additionally, the Enbridge Ingleside Energy Center (EIEC) and Humble Midstream, a
privately held company, plan to develop and jointly market a blue hydrogen and ammonia
production and export facility.

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2022 Guidance
Backed by $10 billion of projects placed into service in 2021 and $4 billion expected in 2022, and
full-year contribution from the EIEC acquisition, ENB reaffirmed its adjusted EBITDA guidance of
$15.0-$15.6 billion, which at the mid-point implies ~9% y/y growth. DCF/share is estimated between
$5.20 and $5.50. With full L3R surcharge and contribution from EIEC for the full year, the company
expects the Liquids Pipelines segment to contribute $8.8 billion to total adjusted EBITDA in 2022,
followed by $4.0 billion from the Gas Transmission and Midstream segment, $1.9 billion from the
Gas Distribution and Storage segment, and $0.45 billion from the Renewable Power Generation
segment. Due to continued weakness on backwardation, the Energy Services segment is expected
to report negative adjusted EBITDA of ~$0.15 billion.

3-Year Outlook (2022-2024)

ENB provided a 3-year outlook (through 2024) in December that envisions 5%-7% growth in
DCF/share supported by revenue inflators, productivity gains, the secured capital program, and the
ability to deploy excess capital. Around that time, the company raised its quarterly dividend to
$0.86/share or ~3% and noted that dividend growth over the next three years should be in line with
DCF/share growth.

Mainline Contracting Update

ENB’s application to contract capacity on the Mainline was rejected by the Canada Energy
Regulator (CER) in late November 2021. Subsequently, the company initiated discussions with
customers to negotiate a Mainline tolling framework. ENB is looking at two options: (1) a negotiated
incentive tolling similar to the competitive toll settlement (CTS), which expired on 6/30/2021, and (2)
cost-of-service. The company plans to file incentive tolling and cost-of-service applications in mid-
2022 and expects a framework to be in place by mid-2023 or late-2023, respectively. ENB is
collecting interim tolls until a framework is approved and noted that the financial outcome of either
framework is not likely to have a material impact on its financial outlook.

Valuation
ENB is currently trading at a 2022E EV/EBITDA multiple of 13.1x, which is at a premium to its North
American pipeline peers. Our target price of $64.00/share corresponds to ~14x 2022E EV/EBITDA
using our EBITDA forecast of $15.4 billion for the year. The dividend yield of 6.0%, which is slightly
higher than the peer group average, coupled with lower-risk, self-funded, longer-term organic DCF
growth potential of 5%-7%, and several multi-billion dollar projects to boost long-term growth
support a premium valuation in our view.

This is only an Investment Brief. Please refer to our Full Report for additional information.

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