For Canada’s two major pipeline companies, 2021 was a year they’d both rather forget. Unfortunately, that won’t be possible. The hangover has carried over into 2022 and will probably still be around next Jan. 1.
It all began with the expected but disappointing announcement that newly elected U.S. President Joe Biden was pulling the plug once and for all on TC Energy’s multi-billion-dollar Keystone XL pipeline.
Work was already well advanced, TC Energy Corp. (TRP-T) had worked out a deal with Indigenous peoples, the trade unions were supportive, and the company had put out a press release that Keystone would be the first pipeline to be fully powered by renewable energy. None of it mattered. On his first day in office, Mr. Biden signed an executive order revoking Donald Trump’s presidential permit, and it was game over.
The company is pursuing a US$15-billion NAFTA legacy damages claim under the new United States-Mexico-Canada agreement, but no one is expecting that to be resolved any time soon.
Keystone wasn’t the only problem TC Energy faced last year. Work on the Coastal Gaslink pipeline was held up for a variety of reasons, including protests, COVID, and permit delays. The project is behind schedule and costs have increased significantly. The company isn’t saying by how much, only that steps are being taken “to mitigate cost increases and schedule delays”.
Meanwhile, Enbridge Inc. (ENB-T) was experiencing cross-border problems of its own. The most serious was the move by the state of Michigan to shut down the company’s Line 5, which runs beneath the Straits of Mackinac and supplies much of the petroleum needs of Ontario and Quebec, as well as Michigan and Ohio.
The action was taken at the initiative of Michigan Governor Gretchen Whitmer, a rising star in the Democratic party, who worries that a rupture in the aging line would cause irreparable damage to the Great Lakes. Enbridge responded with a plan to build a state-of-the-art tunnel to encase the line.
It was hoped in Ottawa that Mr. Biden would intervene to keep the pipeline operational, but Washington has been silent on the matter. This prompted the federal government to invoke the terms of an almost forgotten 1977 Canada-U.S. pipeline treaty to keep the line open. The case has now spilled into 2022, with no movement on either side.
These are the headline pipeline stories that dominated 2021. Meantime, however, the companies involved are moving ahead with other projects and reporting good results. Here’s a look.
Enbridge Ltd.
Background: Enbridge Inc. is one of the largest energy infrastructure companies in North America. It operates an extensive network of crude oil, liquids, and natural gas pipelines and is also involved in regulated natural gas distribution utilities and renewable power generation.
Performance: The stock hit a one-year high of $54 in November but then pulled back and has been trading near the $50 level since.
Recent developments: Third-quarter results showed a significant improvement over the same period in 2020. Adjusted earnings came in at just under $1.2-billion (59 cents a share) compared with $961-million (48 cents) the year before. For the first nine months of the 2021 fiscal year, adjusted earnings were almost $4.2-billion ($2.06 a share), up from $3.8-billion ($1.86) the year before.
Distributable cash flow for the third quarter was $2.29-billion, compared with $2.1-billion in 2020. For the nine months, it was almost $7.6-billion, up from $7.2-billion in 2020.
“The return of energy demand growth to its pre-pandemic trend, coupled with underinvestment in conventional energy and the recent rise in global energy prices, underscores the criticality of affordable, reliable and secure energy supply for consumers and our social well-being,” said CEO Al Monaco. “We believe sustainable development of North America’s significant energy resources is essential to meeting both global energy needs and societal emissions reduction objectives. The energy we deliver is critical to fueling quality of life in North America and globally and this will continue for decades to come.”
On Dec. 31, Enbridge announced the closing of the agreement through which a subsidiary sold its 38.9-per-cent non-operating minority ownership interest in Noverco Inc. to Trencap LP for $1.14-billion in cash. Trencap is a consortium led by Caisse de dépôt et placement du Québec.
The company said the sale “will further strengthen our financial flexibility. Proceeds from the sale will be initially used to repay short term borrowings and support Enbridge’s secured capital program.”
Guidance: In December, Enbridge announced financial guidance for the balance of 2021 and for fiscal 2022. Among the highlights, the company:
- Reaffirmed 2021 full year guidance range for adjusted earnings before interest, income taxes and depreciation (EBITDA) of $13.9-billion to $14.3-billion and distributable cash flow (DCF) per share of $4.70 to $5.
- Announced 2022 financial guidance for EBITDA of $15-billion to $15.6-billion and DCF per share of $5.20 to $5.50, reflecting midpoint growth of 9 per cent and 10 per cent, respectively, relative to 2021 guidance.
- 5-7-per-cent average annual DCF per share growth outlook extended through 2024.
- Approved $1.1-billion of new capital projects adding to its organic growth capital backlog, which is expected to drive significant EBITDA generation through 2024.
- Entered into an agreement with Capital Power to develop a carbon capture and sequestration hub in Alberta.
Dividend/buybacks: The company will raise its quarterly dividend by 3 per cent, effective with the March 1 payment. The new rate will be 86 cents a share ($3.44 annually) for a yield of 6.6 per cent at the current price. This marks the 27th straight year that Enbridge has increased its dividend.
The company also announced the approval of a normal course issuer bid to buy back up to 31 million shares of its common stock to an aggregate amount of up to $1.5-billion. That would represent 1.5 per cent of the total shares outstanding.
Outlook: The numbers are trending in the right direction, but the market still is wary, as the high dividend yield shows.
Action now: Buy. The yield is very attractive and appears to be safe.
TC Energy Inc.
Background: TC Energy is one of North America’s major pipeline companies, with 92,600 kilometres of natural gas pipelines and 4,900 km of oil pipelines. It also owns or has interests in 10 power generation facilities with combined capacity of about 6,000 megawatts.
Performance: The stock hit a 52-week high of $68.20 in October but has pulled back since.
Recent developments: The company reported comparable earnings for the third quarter of $1-billion (99 cents a share), compared with $893-million (95 cents) in the same quarter of 2020. Comparable EBITDA was $2.2-billion, down by $54-million from the same period last year. Reasons included the impact of lower flow-through depreciation and financial charges on the Canadian Mainline. Revenue was slightly ahead of the prior year at $3.24-billion.
“During the first nine months of 2021, our diversified portfolio of essential energy infrastructure assets continued to perform very well and reliably meet North America’s growing demand for energy,” said CEO François Poirier. “Comparable earnings of $3.21 per common share were five per cent higher compared to the same period last year while comparable funds generated from operations totaled $5.3 billion. Both amounts reflect the strong performance of our assets and the utility-like nature of our business together with contributions from projects that entered service in 2020 and 2021.”
Dividend: The stock pays a quarterly dividend of 87 cents a share ($3.48 annually) to yield 5.5 per cent at the current price. I expect to see a dividend increase in the first quarter of 2022.
Outlook: The company has a $22-billion secured capital program underway, with all the projects underpinned by long-term contracts and/or regulated business models. These should increase earnings and cash flow as they enter service.
Action now: Buy. The yield is less than that of Enbridge but still attractive and the shares appear to have more upside price potential.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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Gordon Pape