Enbridge Inc. (NYSE: ENB) is a Canadian energy delivery company that also operates as Canada's largest gas utility company. Enbridge builds and maintains pipelines for the transportation of crude oil and natural gas, most of which comes from either the Gulf of Mexico or the Alberta oil sands. Enbridge is heavily affected by the demand for oil and gas, as the need to move both is what fuels the company's revenue stream. Because a few key clients account for much of its sales, customer relations are extremely important to Enbridge. The Canadian government's regulation of the energy market tends to guarantee Enbridge steady income, but it also limits its growth potential. As a player in the energy delivery market, Enbridge is one of the largest, though it faces increasing competition, especially in Alberta.
Enbridge owns and operates Canada’s natural gas distribution company and provides distribution services in Ontario, Quebec, New Brunswick and New York State. In January 2010, Enbridge's company Enbridge Offshore (Gas Transmission) L.L.C. acquired 50% limited liability company interest in Starfish Pipeline Company, LLC from MarkWest Energy Partners, L.P.
Enbridge is heavily involved in the fossil fuels industry. It earns its revenues by delivering oil and natural gas to business customers via its pipeline systems, and it is also a major natural gas utility company in Canada, providing residential service to customers in several areas. Enbridge constructs and maintains a system of pipelines that deliver crude oil and natural gas all over North America, and it owns and operates the largest natural gas distribution network in Canada. As a utilities company, Enbridge is subject to government regulations that limit growth potential but simultaneously guarantee steady returns.
First Quarter 2010 Results
Enbridge reported adjusted earnings for the first quarter of 2010 of $318 million ($0.86 per share), an increase from the prior year of 19%. First quarter GAAP earnings decreased 39% to $342 million as a result of a one-time asset disposition in 2009.
Liquids Pipelines consists of crude oil, natural gas liquids (NGLs) and refined products pipelines in Canada and the United States. The mainline system consists of the Enbridge System and the Lakehead System. Through six adjacent pipelines with a combined capacity of approximately two million barrels per day (bpd), the system transports crude oil and diluted bitumen from Western Canada to the Midwest region of the United States and Eastern Canada. The Enbridge System also includes two crude oil pipelines and one refined products pipeline with a combined capacity of 0.4 million bpd.
Enbridge Regional Oil Sands System includes two long haul pipelines, the Athabasca Pipeline and the Waupisoo Pipeline, as well as a variety of other facilities including the MacKay River, Christina Lake, Surmont and Long Lake facilities. It also includes the Company’s interest in the Hardisty Caverns Limited Partnership, which provides crude oil tankage services and three large terminals, the Athabasca Terminal located North of Fort McMurray, Alberta and the Cheecham Terminal, which is a new hub located 95 kilometers south of Fort McMurray where the Waupisoo Pipeline initiates. The Athabasca Pipeline is a 540 kilometer (335 mile) synthetic and heavy oil pipeline, which links the Athabasca oil sands in the Fort McMurray, Alberta region to a pipeline hub at Hardisty, Alberta. The Athabasca Pipeline has a design capacity of approximately 570,000 bpd and is configured to transport approximately 345,000 bpd.
The Waupisoo Pipeline is a 380 kilometer (236 mile) synthetic and heavy oil pipeline that provides access to the Edmonton market for oil sands producers. The Waupisoo Pipeline initiates at Enbridge’s Cheecham Terminal and terminates at its Edmonton Mainline Terminal. Spearhead Pipeline delivers crude oil from Chicago, Illinois to Cushing, Oklahoma. Enbridge has a 65% interest in the Olympic Pipeline, the refined products pipeline in the State of Washington, transporting approximately 290,000 bpd of gasoline, diesel and jet fuel. The pipeline system extends approximately 480 kilometres (300 miles) from Blaine, Washington to Portland, Oregon, connecting four Puget Sound refineries to terminals in Washington and Portland. BP Pipelines (North Amercia) Inc. (BP) is the operator of the pipeline.
The Company’s natural gas utility operations is Enbridge Gas Distribution (EGD), which serves residential, commercial, industrial and transportation customers, primarily in central and eastern Ontario as well as northern New York State. This business segment also includes natural gas distribution activities in Quebec and New Brunswick. This segment also includes the Company’s investment in Aux Sable, a natural gas fractionation and extraction business. EGD serves approximately 1.9 million customers in central and eastern Ontario and parts of northern New York State. EGD’s utility operations are regulated by the Ontario Energy Board (OEB), and by the New York State Public Service Commission. TransCanada Pipelines Ltd. (TransCanada) transports approximately 61% or 261 bcf of the annual natural gas supply requirements of the Company’s customers. EGD has transportation service contracts with TransCanada for a portion of this requirement. EGD’s principal storage facilities are located in southwestern Ontario, near Dawn, and have a total working capacity of approximately 102 bcf.
Enbridge owns an equity interest in Noverco through ownership of 32.1% of the common shares and a cost investment in preferred shares. Noverco is a holding company that owns approximately 71.0% of Gaz Metro Limited Partnership (Gaz Metro), a publicly traded gas distribution company operating in the province of Quebec and in the state of Vermont. The Company’s other Gas Distribution includes natural gas distribution utility operations in Quebec, New Brunswick and northern New York State. The Company provides operating services to, and holds a 60% joint venture interest in, Vector Pipeline, which transports natural gas from Chicago, Illinois to Dawn, Ontario. Vector Pipeline has the capacity to deliver a nominal 1.3 bcf/d and is operating at or near capacity.
Vector Pipeline’s primary sources of supply are through interconnections with the Alliance System and the Northern Border Pipeline in Joliet, Illinois. Enbridge Offshore Pipelines is comprised of 13 natural gas gathering and Federal Energy Regulatory Commission (FERC) regulated transmission pipelines and one oil pipeline in five corridors in the Gulf of Mexico, extending to deepwater frontiers. These pipelines include almost 2,400 kilometers of underwater pipe and onshore facilities. During the year ended December 31, 2009, these pipelines transported approximately 2.3 bcf/d.
Sponsored Investments includes the Company’s 27% ownership interest in EEP. Enbridge manages the day-to-day operations of, and develops and assesses opportunities for each of these, including both organic growth and acquisition opportunities. EEP owns and operates crude oil and liquid petroleum transportation and storage assets and natural gas gathering, treating, processing, transportation and marketing assets in the United States. Its assets include the Lakehead System, which is the extension of the Enbridge System in the United System, the Mid-Continent crude oil system consisting of an interstate crude oil pipeline and storage facilities; a crude oil gathering system and interstate pipeline system in North Dakota; and natural gas assets located primarily in Texas.
EIF’s assets include a 50% interest in Alliance Pipeline Canada and the 100%-owned Enbridge Saskatchewan System. Alliance Pipeline Canada is the Canadian portion of the Alliance System. The Enbridge Saskatchewan System owns and operates crude oil and liquids pipelines systems from producing fields in Southern Saskatchewan and Southwestern Manitoba connecting primarily with Enbridge’s mainline pipeline to the United States. EIF also owns interests in three wind power generation projects and a business that develops and operates waste-heat power generation projects at Alliance Pipeline Canada compressor stations.
Corporate also includes the Company’s investments in green energy projects, including the Ontario Wind Project, the Talbot Wind Energy Project and the Sarnia Solar Project. The Company’s 190-megawatt (MW) Ontario Wind Project, located in the Municipality of Kincardine on the eastern shore of Lake Huron in Ontario. In November 2009, Enbridge announced the development of the 99-MW Talbot Wind Energy Project near Chatham, Ontario with Renewable Energy Systems Canada Inc. (RES Canada). Enbridge has a 90% interest in the project and an option to acquire the remaining 10% interest. RES Canada constructs the wind project under a fixed price, turnkey, engineering, procurement and construction agreement. The project utilizes 43 Siemens 2.3-MW wind turbines. In October 2009, Enbridge announced the development of the 20-MW Sarnia Solar Project with First Solar, Inc. (First Solar).
The Company’s energy Services includes Gas Services and Tidal Energy, the Company’s energy marketing businesses. Gas Services markets natural gas and provides fee-for-service arrangements for third parties for access to transportation capacity. Tidal Energy provides crude oil and NGLs marketing services for the Company and its customers in a range of condensate and crude oil types, including light sweet, light and medium sours and several heavy grades.
Enbridge uses a three-tiered expansion strategy that aims to maintain growth, both organic and inorganic.
Enbridge has the potential to reduce competition by acquiring smaller energy transport companies; in the past, the company has used this strategy as a primary source of growth. As an example, Enbridge bought Shell's Gulf of Mexico natural gas pipelines in 2004, increasing capacity, decreasing competitive pressure, and creating another source of revenue for the company. As the industry consolidates, however, there will be fewer opportunities for Enbridge to acquire competitors. Since acquisitions are a limited resource, an increasingly larger portion of Enbridge's growth will have to be organic in nature, occurring within the company itself.
Higher levels of oil and natural gas production are only beneficial if Enbridge has the capacity to deliver the larger amounts. The company is planning to build a new oil pipeline running from Alberta to the West Coast of the U.S., though competitive pressure could easily halt the project. The increasing production of natural gas in the Gulf of Mexico region is a boon to Enbridge, as it can easily expand its existing distribution network in the South, increasing both capacity and returns. Potential obstacles to pipeline expansion include the construction of competing pipelines and failing to ensure sufficient supplies of oil or gas to utilize the increased capacity; in the Gulf region, however, neither appear to be problems as of yet. Recently, the company announced a capacity-expanding project with a cost of $14 billion going into 2012. With net fixed assets of only $12 billion, the expansions could prove extremely risky, especially given the recent negative publicity over the company's history of pipeline ruptures.
Enbridge, through the Enbridge Income Fund and other sponsored investments, is making ventures into new energy fields to expand its revenue base and hedge its bets on other oil and natural gas companies. For example, Enbridge has been venturing past energy transportation and into energy creation through wind power, natural gas power, and other alternative energy types. The company is also researching new energy storage technologies. Depending on how oil prices and demand for alternative energy sources fare, these could become much larger markets for Enbridge and provide significant room for expansion. In the short term, however, new energy sources could decrease revenue from oil and natural gas, Enbridge's primary source of income.
Enbridge's success is tied to the success of the fossil fuel industry, especially oil and natural gas. Its revenues are also subject to government regulation and, because it is an international company, exchange rates.
Fossil fuels are hydrocarbons; they are called "fossil" fuels because they come from decayed plants and animals that have been buried for millions of years. When burned, fossil fuels are highly efficient sources of energy and have been the primary source of power, worldwide, since the Industrial Revolution. The main fossil fuels used for energy include oil, coal, and natural gas. Since Enbridge is in the business of transporting and distributing both oil and natural gas, its overall success is highly correlated with the demand for these fuels. As of yet, no truly viable alternatives to fossil fuels have been discovered; this fact, combined with rising energy consumption worldwide, suggests that the demand, and therefore prices, of both oil and natural gas should remain high for the foreseeable future.
Oil and natural gas prices have fluctuated heavily over the past few years, reflecting any number of political and economic factors; the most recent trend, however, has been an overall rise in prices, with a barrel of oil selling for as much as $75. Because both oil and natural gas take millions of years to form, they are considered nonrenewable energy sources, meaning our current supplies will eventually run out. In addition, the discovery of new oil and natural gas reserves has been less and less frequent, leading to higher prices as people anticipate the future depletion of global energy supplies. As these traditionally cheap forms of energy become more and more expensive, the demand for cheaper, renewable energy sources has risen. While Enbridge dabbles in some other forms of energy production, like wind energy, its primary inputs are oil and natural gas; rising oil and gas prices can increase Enbridge's operating expenses and result in higher prices for its customers. In either case, profitability could be impacted either positively or negatively, depending on how the company manages to pass the costs along to customers without driving them away.
Fossil fuels, though highly cost-efficient forms of energy, produce significant amounts of "greenhouse gases" when burned. Increasing concern about the role of these gases in environmental degradation and global climate change has spawned a growing movement promoting the development of "cleaner" energy using wind or solar power. The "green" movement has grown quite large, with numerous politicians, lobbyists, and consumer groups all pushing for tougher environmental legislation and more emphasis on alternative energy research. If they were to succeed, the increased regulations would likely drive fossil fuel prices up. Since oil and natural gas make up the vast majority of Enbridge's business, this would be detrimental to the company's bottom line.
In 2010 there were concerns that an oil pipeline spill in Michigan by an Enbridge pipeline would impact demand in the US for Canadian oil but the US ambassador to Canada refuted those charges
Enbridge produces pipelines for only a few companies, so its revenue is highly dependent on its relationships with these key customers. Additionally, there isn't much room for differentiation in the fossil fuel transport industry (pipelines are pretty similar, regardless of who made it), further highlighting the significance of Enbridge's maintaining good customer relationships. Such substantial dependence on the spending whims of a few companies can make Enbridge's revenues somewhat volatile.
Enbridge's Canadian utilities business is subject to heavy government regulation. Like most utilities companies, the government prevents Enbridge from raising prices above a certain level, putting a cap on the company's overall profitability. On the other hand, the government also gives Enbridge monopoly rights for the area in which it provides gas; it blocks new companies from entering the market, allowing only minimal competition. This almost guarantees Enbridge a steady revenue stream, though at the cost of potentially higher profits.
Since Enbridge is based in Canada but does a large portion of its business in the U.S., exchange rate between the Canadian and U.S. dollars can have a considerable effect on revenue translation. Most of the revenue generated from Enbridge's pipeline business is denominated in USD, and a large portion of the company's assets are held in the U.S. As such, the current appreciative trend of the Canadian dollar against the USD could potentially devalue earnings from the U.S., raise costs incurred in the U.S., and lower overall profitability. uuguggugiufuyu
Natural disasters, especially hurricanes, can damage large portions of Enbridge's pipeline systems and other infrastructure. With its acquisition of Shell's natural gas operations in the Gulf of Mexico, Enbridge tapped into a valuable energy-producing and region. At the same time, the Gulf of Mexico is commonly hit by hurricanes; the season, lasting from June 1 until November 30 of every year, is probably one of Enbridge's least favorite times of year, since a major hurricane could inflict severe damage on its equipment in the area. In 2005, the devastating Hurricane Katrina forced at least eight Gulf refineries to close (which represents about 10% of the U.S.'s capacity). A repeat of such a powerful storm would spell trouble for Enbridge and other companies with operations in the region.
Enbridge faces competitive pressure from Kinder Morgan Energy Partners, L.P. (KMP), Transcananda Pipelines (TRP), and Enterprise Products Partners L.P. (EPD). In the energy transport industry, there are very few opportunities for product differentiation. The primary method of competing in the industry is through building relationships with oil and gas producers. While Enbridge has strong ties to Exxon Mobil and Royal Dutch Shell, relationships with smaller producers also matter, and the commodity nature of the pipeline makes customer security both volatile and necessary. For example, Kinder Morgan and Enbridge both see revenue potential from a Alberta-west coast pipeline. Building a pipeline would be useless without customers to put oil in the pipes; whoever has a better relationship with oil companies that want to send their oil to the west coast will end up building the pipe. In this case, Kinder Morgan is probably going to end up building the pipe, as they have more support for the venture. If Enbridge were also to build a pipe, both companies would suffer from the competitive pressure of overcapacity.
In Alberta, Enbridge has heavy competition. Aside from Kinder Morgan's west coast pipe dream (pun intended), TransCanada wants to build a pipe to Chicago. Though extra capacity in Enbridge's already-established Alberta-to-Chicago pipe makes TransCanada's project less cost-effective, the fact that ConocoPhillips is supporting the project means that it is very likely to go through in the future. If this were to happen, the pressure would make Enbridge's revenues fall and crunch profits.
Enbridge faces little pressure in the Gulf of Mexico. Because it is already a well-established carrier in the region, and has a large pipe network, Enbridge can add infrastructure to new fields relatively cheaply, giving them a cost-advantage over existing competitors and new entrants. There is little government price regulation in the area (though there are more environmental considerations), making potential profitability high but the risk of companies entering the market high also.
As a utilities company, Enbridge has a huge advantage over competitors because it is the largest gas utility in Canada. Business in this area is highly stable because government utility regulations, though they put caps on profitability, guarantee steady revenues by blocking competing firms from entering the market.