| ENBRIDGE GAS INC. |
| | CONSOLIDATED STATEMENTS OF EARNINGS |
| | | Three months ended |
| | | | March 31, |
| | | 2020 | | 2019 |
| | | | | | (unaudited; millions of Canadian dollars)Operating revenues (Note 3) |
| | | | | | Gas commodity and distribution revenue | 1,403 | | 1,849 |
| | | | | | Storage and transportation revenue | 244 | 272 |
| | | | | | Other revenue | 16 | 18 |
| | | | | | Total operating revenues | 1,663 | | 2,139 |
| | | | | | Operating expenses |
| | | | | | Gas commodity and distribution costs | 871 | 1,251 |
| | | | | | Operating and administrative | 241 | 283 |
| | | | | | Depreciation and amortization | 152 | 160 |
| | | | | | Total operating expenses | 1,264 | | 1,694 |
| | | | | | Operating income | 399 | 445 |
| | | | | | Other income | 18 | 2 |
| | | | | | Interest expense, net | (103) | (97) |
| | | | | | Earnings before income taxes | 314 | 350 |
| | | | | | Income tax expense (Note 8) | (32) | (60) |
| | | | | | Earnings | 282 | 290 |
| | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
1 |
| ENBRIDGE GAS INC. |
| | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| | | Three months ended |
| | | | March 31, |
| | | 2020 | | 2019 |
| | (unaudited; millions of Canadian dollars) |
| | Earnings | | 282 | 290 |
| | Other comprehensive income/(loss), net of tax (Notes 6 and 7) |
| | Change in unrealized loss on cash flow hedges | | (41) | (24) |
| | Reclassification to earnings of realized loss on cash flow hedges | | 2 | 1 |
| | Recognition of regulatory offset | | — | 55 |
| | Actuarial gain/(loss) on other postretirement benefits (OPEB) | | 1 | (1) |
| | Foreign currency translation adjustment | | — | (1) |
| | Other comprehensive income/(loss), net of tax | | (38) | 30 |
| | Comprehensive income | | 244 | 320 |
| | The accompanying notes are an integral part of these consolidated financial statements. |
2 |
| ENBRIDGE GAS INC. |
| | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| | | | | Accumulated |
| | | | | | Other |
| | | Additional | | Comprehensive |
Common | | | Paid-in Capital | | | Loss |
SharesDeficit | | (Note 6) | Total |
| | (unaudited; millions of Canadian dollars)December 31, 2019 |
3,517 | | | 7,253 | (720) | | (46) | 10,004 |
| | Earnings | — | | | | | | | | — | 282 | | — | 282 |
| | Other comprehensive loss, net of tax | — | | | | | | | | — | — | | (38) | (38) |
| | Return of capital (Note 5) | (200) | | | | | | | | — | — | | — | (200) |
| | Common share dividends declared | — | | | | | | | | — | (112) | | — | (112) |
| | Adoption of new accounting standard | — | | | | | | | | — | (2) | | — | (2) |
| | March 31, 2020 | 3,317 | | | 7,253 | (552) | | (84) | 9,934 |
| | December 31, 2018 | 3,030 | | | 7,253 | (339) | | (51) | 9,893 |
| | Earnings | — | | | | | | | | — | 290 | | — | 290 |
| | Other comprehensive income, net of tax | — | | | | | | | | — | — | | 30 | 30 |
| | Return of capital | (1) | | | | | | | | — | — | | — | (1) |
| | Common share dividends declared | — | | | | | | | | — | (313) | | — | (313) |
| | March 31, 2019 | 3,029 | | | 7,253 | (362) | | (21) | 9,899 |
| | The accompanying notes are an integral part of these consolidated financial statements. |
3 |
| ENBRIDGE GAS INC. |
| | CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | Three months ended |
| | | | March 31, |
| | | 2020 | | 2019 |
| | | | | | (unaudited; millions of Canadian dollars) |
| | | | | | Operating activitiesEarnings |
| | | | 282 | 290 |
| | | | | | Adjustments to reconcile earnings to net cash provided by operating activities: |
| | | | | | Depreciation and amortization | 152 | 160 |
| | | | | | Deferred income tax expense/(recovery) | 2 | (14) |
| | | | | | Net defined pension and OPEB costs | (7) | (4) |
| | | | | | Other | 3 | (2) |
| | | | | | Changes in operating assets and liabilities | 223 | 179 |
| | | | | | Net cash provided by operating activities | 655 | 609 |
| | | | | | Investing activities |
| | | | | | Capital expenditures | (223) | (156) |
| | | | | | Additions to intangible assets | (18) | (9) |
| | | | | | Net cash used in investing activities | (241) | (165) |
| | | | | | Financing activities |
| | | | | | Change in bank indebtedness | — | 7 |
| | | | | | Net change in short-term borrowings | (62) | (155) |
| | | | | | Common share dividends | (112) | (313) |
| | | | | | Return of capital | (200) | (1) |
| | | | | | Net cash used in financing activities | (374) | (462) |
| | | | | | Net increase/(decrease) in cash, cash equivalents and restricted cash | 40 | (18) |
| | | | | | Cash, cash equivalents and restricted cash at beginning of period | 77 | 49 |
| | | | | | Cash, cash equivalents and restricted cash at end of period | 117 | 31 |
| | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
4 |
| ENBRIDGE GAS INC. |
| | CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
| | | March 31, | | December 31, |
| | | | 2020 | | 2019 |
| | | | | | | (unaudited; millions of Canadian dollars, number of shares in millions) |
| | | | | | | AssetsCurrent assets |
| | Cash | | 117 | | 77 |
| | Accounts receivable and other | | 1,342 | | 1,317 |
| | Accounts receivable from affiliates | | 44 | | 46 |
| | Gas inventory | | 304 | | 631 |
| | | | 1,807 | | 2,071 |
| | | | | | | Property, plant and equipment, net | 15,426 | | | 15,418 |
| | | | | | | Deferred amounts and other assets | 2,294 | | 2,235 |
| | | | | | | Intangible assets, net | 165 | | 173 |
| | | | | | | Goodwill | 4,784 | | 4,784 |
| | | | | | | Total assets | 24,476 | | | 24,681 |
| | | | | | | Liabilities and shareholders’ equityCurrent liabilities |
| | Short-term borrowings (Note 4) | | 835 | | 898 |
| | Accounts payable and other | | 1,158 | | 1,369 |
| | Accounts payable to affiliates | | 195 | | 113 |
| | Current portion of long-term debt | | 400 | | 400 |
| | | | 2,588 | | 2,780 |
| | | | | | | Long-term debt | 7,809 | | 7,815 |
| | | | | | | Other long-term liabilities | 2,043 | | 1,999 |
| | | | | | | Deferred income taxes | 1,452 | | 1,433 |
| | | | | | | Loan from affiliate (Note 4) | 650 | | 650 |
| | | 14,542 | | | 14,677 |
| | | | | | | Shareholders’ equity |
| | Common shares (522 shares outstanding at March 31, 2020 and December 31, 2019) (Note 5) |
| | | | 3,317 | | 3,517 |
| | Additional paid-in capital | | 7,253 | | 7,253 |
| | Deficit | | (552) | | (720) |
| | Accumulated other comprehensive loss (Note 6) | | (84) | | (46) |
| | | | 9,934 | | 10,004 |
| | | | | | | Total liabilities and shareholders' equity | 24,476 | | | 24,681 |
| | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
5 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
(unaudited) |
| | 1. BASIS OF PRESENTATION |
| | The accompanying unaudited interim consolidated financial statements of Enbridge Gas Inc. (the Company) have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) for interim consolidated financial information. They do not include all of the information and notes required by U.S. GAAP for annual consolidated financial statements and should therefore be read in conjunction with the Company’s audited annual consolidated financial statements and notes for the year ended December 31, 2019. |
| | On January 1, 2019, Enbridge Gas Distribution Inc. (EGD) and Union Gas Limited (Union Gas) amalgamated and have continued from this date as the Company. The Company continues to have all of the assets, rights, contracts, liabilities and obligations of each of EGD and Union Gas, including licenses and permits. |
| | In the opinion of management, these interim consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods reported. These interim consolidated financial statements follow the same significant accounting policies as those included in the Company’s audited annual consolidated financial statements for the year ended December 31, 2019, except for the adoption of new standards as described in Note 2 Changes in Accounting Policies. Amounts are stated in Canadian dollars unless otherwise indicated. |
| | The Company’s operations and earnings for interim periods can be affected by seasonal fluctuations aswell as other factors such as supply of and demand for natural gas and may not be indicative of annualresults. |
| | 2. CHANGES IN ACCOUNTING POLICIES |
| | ADOPTION OF NEW ACCOUNTING STANDARDSClarifying Interaction between Collaborative Arrangements and Revenue from Contracts with CustomersEffective January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2018-18 on a retrospective basis. The new standard was issued in November 2018 to provide clarity on when transactions between entities in a collaborative arrangement should be accounted for under the new revenue standard, Accounting Standards Codification (ASC) 606. In determining whether transactions in collaborative arrangements should be accounted for under the revenue standard, the update specifies that entities shall apply unit of account guidance to identify distinct goods or services and whether such goods and services are separately identifiable from other promises in the contract. ASU 2018-18 also precludes entities from presenting transactions with a collaborative partner which are not in scope of the new revenue standard together with revenue from contracts with customers. The adoption of this ASU did not have a material impact on the consolidated financial statements. |
| | Disclosure EffectivenessEffective January 1, 2020, the Company adopted ASU 2018-13 on both a retrospective and prospective basis depending on the change. The new standard was issued to improve the disclosure requirements for fair value measurements by eliminating and modifying some disclosures, while also adding new disclosures. The adoption of this ASU did not have a material impact on the consolidated financial statements. |
6 |
| Accounting for Credit LossesEffective January 1, 2020, the Company adopted ASU 2016-13 on a modified retrospective basis. |
| The new standard was issued in June 2016 with the intent of providing financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The previous accounting treatment used the incurred loss methodology for recognizing credit losses that delayed the recognition until it was probable a loss had been incurred. The accounting update adds a new impairment model, known as the current expected credit loss model, which is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the Financial Accounting Standards Board believes results in more timely recognition of such losses. |
| Further, ASU 2018-19 was issued in November 2018 to clarify that operating lease receivables should be accounted for under the new leases standard, ASC 842, and are not within the scope of ASC 326, Financial Instruments - Credit Losses. |
| For accounts receivable, a loss allowance matrix is utilized to measure lifetime expected credit losses. The matrix contemplates historical credit losses by age of receivables, adjusted for any forward-looking information and management expectations. |
| The adoption of this ASU did not have a material impact on the consolidated financial statements. |
| FUTURE ACCOUNTING POLICY CHANGESReference Rate ReformASU 2020-04 was issued in March 2020 to provide temporary optional guidance in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles when accounting for contract modifications, hedging relationships and other transactions impacted by rate reform, subject to meeting certain criteria. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of the new standard and the rate reform on the consolidated financial statements. |
| Accounting for Income TaxesASU 2019-12 was issued in December 2019 with the intent of simplifying the accounting for income taxes. The accounting update removes certain exceptions to the general principles in ASC 740 as well as provides simplification by clarifying and amending existing guidance. ASU 2019-12 is effective January 1, 2021 and entities are permitted to adopt the standard early. The Company is currently assessing the impact of the new standard on the consolidated financial statements. |
| Disclosure EffectivenessASU 2018-14 was issued in August 2018 to improve disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendment modifies the current guidance by adding and removing several disclosure requirements while also clarifying the guidance on current disclosure requirements. ASU 2018-14 is effective January 1, 2021 and entities are permitted to adopt the standard early. The adoption of ASU 2018-14 is not expected to have a material impact on the consolidated financial statements. |
7 |
| 3. REVENUE |
| REVENUE FROM CONTRACTS WITH CUSTOMERSMajor Services |
| | Three months ended |
| | | March 31, |
| | 2020 | | 2019 |
| | | | | |
| (millions of Canadian dollars) |
| Gas commodity and distribution revenue - residential | | 951 | 1,198 |
| Gas commodity and distribution revenue - commercial and industrial | | 451 | 621 |
| Storage revenue | | 35 | 37 |
| Transportation revenue | | 217 | 238 |
| Other revenue | | 15 | 17 |
| Total revenue from contracts with customers | 1,669 | | 2,111 |
| Other1 | | (6) | 28 |
| Total operating revenues | 1,663 | | 2,139 |
| 1 Primarily relates to the effects of rate-regulated accounting. |
| The Company disaggregates revenue into categories which represent its principal performanceobligations. These revenue categories represent the most significant revenue streams, andconsequently are considered to be the most relevant revenue information for management to consider inevaluating performance. |
| Contract Balances |
| | | | Contract |
| | | | | | Receivables | Liabilities |
| (millions of Canadian dollars) |
| Balance as at January 1, 2020 | 613 | | 65 |
| Balance as at March 31, 2020 | 813 | | — |
| Receivables represent an unconditional right to consideration where only the passage of time is requiredbefore payment of consideration is due and consist of trade accounts receivable, unbilled revenue andother accrued receivable balances. |
| Contract liabilities represent payments received for performance obligations which have not been fulfilled under the Company's equal billing and budget billing programs. Revenue recognized during the three months ended March 31, 2020 included in contract liabilities at the beginning of the period is $65 million. There were no increases in contract liabilities from cash received, net of amounts recognized as revenue, during the three months ended March 31, 2020. |
| Performance ObligationsThe Company recognized a reduction of revenue in the current period of $22 million from performance obligations satisfied in previous periods, primarily resulting from differences in actual and estimated consumption. The associated reduction in gas commodity and distribution costs was also recognized in the current period. |
| Revenue to be Recognized from Unfulfilled Performance ObligationsTotal revenue from performance obligations expected to be fulfilled in future periods is $561 million, of which $252 million is expected to be recognized during the remaining nine months of the year ending December 31, 2020. |
8 |
| The amounts above reflect revenues expected to be recognized in future periods from unfulfilled performance obligations pursuant to contracts with customers for the purchase of natural gas distribution, transportation and storage services. The Company uses the optional exemption available under ASC 606 whereby certain revenues such as flow through costs charged to customers are recognized at the amount for which the Company has the right to invoice its customers. Those revenues are not included in the amounts above. The Company also uses the optional exemption available under ASC 606 whereby revenues from contracts with customers which have an original expected duration of one year or less are excluded from the amounts above. Variable consideration is also excluded from the amounts above due to the uncertainty of the associated consideration, which is generally resolved when actual volumes and prices are determined. For example, the Company considers interruptible transportation service revenues to be variable revenues since volumes cannot be estimated. A significant portion of the Company's operations are subject to regulation and accordingly the amounts above only include, where applicable, revenue for which the underlying rate has been approved by regulation. The revenues excluded from the amounts above, as explained, represent a significant portion of the Company's overall revenues and revenues from contracts with customers. |
| Recognition and Measurement of Revenues |
| | Three months ended |
| | | March 31, |
| | 2020 | | 2019 |
| | | | | |
| (millions of Canadian dollars) |
| Revenue from products and services transferred over time1 | 1,654 | | 2,094 |
| Revenue from products transferred at a point in time2 | | 15 | 17 |
| Total revenue from contracts with customers | 1,669 | | 2,111 |
| 1 Revenue from distribution, transportation and storage services.2 Primarily from other revenue. |
| 4. DEBT |
| CREDIT FACILITYThe Company actively manages its bank funding sources to ensure adequate liquidity and to optimize pricing and other terms. The following table provides details of the Company’s credit facility at March 31, 2020. |
| | | | | | March 31, | December 31, |
| | 2020 | | 2019 |
| | | | | | | Maturity | Total Facility | Draws1 | Available | Total Facility |
| (millions of Canadian dollars) |
| 364 day extendible credit |
| facility3 | | | | | | 20212 | 2,000 | | | | | | | | | 835 | 1,165 | | 2,000 |
| 1 Includes facility draws and commercial paper issuances, net of discount, that are back-stopped by the external credit facility.2 Maturity date is inclusive of the one year term out option.3 External credit facility. |
| The credit facility carries a weighted average standby fee of 0.1% on the unused portion and the draws bear interest at market rates. |
9 |
| LONG-TERM DEBT ISSUANCEOn April 1, 2020, the Company issued $600 million of 2.90% 10-year medium-term notes (MTN) and $600 million of 3.65% 30-year MTNs payable semi-annually in arrears. The notes mature on April 1, 2030 and April 1, 2050, respectively. With proceeds from this issuance, the Company repaid its outstanding $650 million subordinated promissory note, as well as the related interest payable, due to Westcoast Energy Inc. on April 1, 2020. The note is presented as Loan from affiliate in the Consolidated Statements of Financial Position as at March 31, 2020. |
| DEBT COVENANTSThe Company’s credit facility agreements and term debt indentures include standard events of default and covenant provisions whereby accelerated repayment and/or terminations of the agreements may result if the Company were to default on payment or violate certain covenants. As at March 31, 2020, the Company was in compliance with all debt covenants. |
| 5. SHARE CAPITAL |
| On February 14, 2020, the stated capital of Class A common shares held by Enbridge Energy Distribution Inc. and Class B common shares held by Great Lakes Basin Energy L.P. were reduced by approximately $108 million and $92 million, respectively, as part of a return of capital transaction, which had no impact on total shares outstanding. |
| 6. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS |
| Changes in Accumulated other comprehensive loss (AOCI) for the three months ended March 31, 2020 and 2019 are as follows: |
| | 2020 |
| | | | Cumulative |
| | | Cash Flow | Translation | OPEB |
| | | Hedges | Adjustment | Adjustment | | | | Total |
| (millions of Canadian dollars)Balance at January 1, 2020 |
| | | | | | | (42) | — | | | (4) | (46) |
| Other comprehensive income/(loss) retained in AOCI | | | | | | (56) | — | | | 2 | (54) |
| Other comprehensive loss reclassified to earnings | | | 2 | — | | | — | 2 |
| | | | | | | (96) | — | | | (2) | (98) |
| Tax Impact |
| Income tax on amounts retained in AOCI | | | | | | 15 | — | | | (1) | 14 |
| Balance at March 31, 2020 | | | | | | (81) | — | | | (3) | (84) |
| | 2019 |
| | | | Cumulative | Pension and |
| | | Cash Flow | Translation | OPEB |
| | | Hedges | Adjustment | Adjustment | | | | Total |
| (millions of Canadian dollars)Balance at January 1, 2019 |
| | | | | | | (9) | 5 | | | (47) | (51) |
| Other comprehensive income/(loss) retained in AOCI1 | | | | | | (33) | (1) | | | 73 | 39 |
| Other comprehensive loss reclassified to earnings | | | 1 | — | | | — | 1 |
| | | | | | | (41) | 4 | | | 26 | (11) |
| Tax Impact |
| Income tax on amounts retained in AOCI1 | | | 9 | — | | | (19) | (10) |
| Balance at March 31, 2019 | | | | | | (32) | 4 | | | 7 | (21) |
| 1 Other comprehensive income (OCI) for the three months ended March 31, 2019 was increased by an adjustment of $74 million in |
| respect of the Company applying rate-regulated accounting to record a regulatory offset to certain pension liabilities. An offsetting amount of $19 million was also recorded in OCI for the related tax impact. |
10 |
| 7. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS |
| MARKET RISKThe Company’s earnings, cash flows and OCI are subject to movements in natural gas prices, foreign exchange rates and interest rates (collectively, market risk). Portions of these risks are borne by customers through certain regulatory mechanisms. Formal risk management policies, processes and systems have been designed to mitigate these risks. |
| The following summarizes the types of market risks to which the Company is exposed and the risk management instruments used to mitigate them. The Company uses a combination of qualifying and non-qualifying derivative instruments to manage the risks noted below. |
| Natural Gas Price RiskNatural gas price risk is the risk of gain or loss due to changes in the market price of natural gas. In compliance with the directive of the OEB, fluctuations in natural gas prices are borne by the customers. |
| Foreign Exchange RiskForeign exchange risk is the risk of gains and losses due to the volatility of currency exchange rates. Until November 1, 2019, the Company generated certain revenues and held a subsidiary that was denominated in United States dollars (USD). As a result, the Company’s earnings, cash flows and OCI were exposed to fluctuations resulting from USD exchange rate variability. |
| The Company implemented a policy to hedge a portion of its USD denominated unregulated storage revenue exposures. Qualifying derivative instruments are used to hedge anticipated USD denominated revenues and to manage variability in cash flows. |
| A portion of the Company’s purchases of natural gas are denominated in USD and, as a result, there is exposure to fluctuations in the exchange rate of the USD against the Canadian dollar. Realized foreign exchange gains or losses relating to natural gas purchases are passed on to customers, therefore the Company has no net exposure to movements in the foreign exchange rate on natural gas purchases. Interest Rate RiskThe Company’s earnings and cash flows are exposed to short-term interest rate variability due to the regular repricing of its variable rate debt, primarily commercial paper. Pay fixed-receive floating interest rate swaps are used to hedge against the effect of future interest rate movements. The Company has implemented a program to significantly mitigate the impact of short-term interest rate volatility on interest expense via execution of floating-to-fixed interest rate swaps with an average swap rate of 2.3%. |
| The Company’s earnings and cash flows are also exposed to variability in longer term interest rates ahead of anticipated fixed rate debt issuances. Forward starting interest rate swaps are used to hedge against the effect of future interest rate movements. The Company has implemented a program to significantly mitigate its exposure to long-term interest rate variability on select forecast term debt issuances via execution of floating-to-fixed interest rate swaps with an average swap rate of 2.8%. |
| The Company’s portfolio mix of fixed and variable rate debt instruments is monitored by its ultimate parent company, Enbridge Inc. (Enbridge). |
11 |
| TOTAL DERIVATIVE INSTRUMENTSThe following table summarizes the financial statement line item in the Consolidated Statements of Financial Position and carrying value of the Company’s derivative instruments. |
| The Company generally has a common practice of entering into individual International Swaps and Derivatives Association, Inc. agreements, or other similar derivative agreements, with the majority of its derivative counterparties. These agreements provide for the net settlement of derivative instruments outstanding with specific counterparties in the event of bankruptcy or other significant credit event, and would reduce the Company’s credit risk exposure on derivative asset positions outstanding with these counterparties in those particular circumstances. The following table also summarizes the maximum potential settlement amount in the event of those specific circumstances. All amounts are presented gross in the Consolidated Statements of Financial Position. |
| | Derivative | | Total Gross |
| | Instruments | Non-Qualifying | | | | Derivative | Amounts | Total Net |
| | Used as Cash | Derivative | Instruments as | Available for | Derivative |
| March 31, 2020 | Flow Hedges | Instruments | | | | Presented | Offset | Instruments |
| (millions of Canadian dollars)Accounts payable to affiliates |
| Interest rate contracts | (9) | | | | | | | — | (9) | — | (9) |
(9) | | | | | | | — | (9) | — | (9) |
| Other long-term liabilities |
| Interest rate contracts | (43) | | | | | | | — | (43) | — | (43) |
(43) | | | | | | | — | (43) | — | (43) |
| Total net derivative liability |
| Interest rate contracts | (52) | | | | | | | — | (52) | — | (52) |
(52) | | | | | | | — | (52) | — | (52) |
| | Derivative | | Total Gross |
| | Instruments | Non-Qualifying | | | | Derivative | Amounts | Total Net |
| | Used as Cash | Derivative | Instruments as | Available for | Derivative |
| December 31, 2019 | Flow Hedges | Instruments | | | | Presented | Offset | Instruments |
| (millions of Canadian dollars)Accounts payable to affiliates |
| Interest rate contracts | (9) | | | | | | | — | (9) | — | (9) |
(9) | | | | | | | — | (9) | — | (9) |
| Other long-term liabilities |
| Interest rate contracts | (13) | | | | | | | — | (13) | — | (13) |
(13) | | | | | | | — | (13) | — | (13) |
| Total net derivative liability |
| Interest rate contracts | (22) | | | | | | | — | (22) | — | (22) |
(22) | | | | | | | — | (22) | — | (22) |
| The following table summarizes the maturity and notional principal or quantity outstanding related to the Company's derivative instruments. |
| March 31, 2020 | 2020 | | | 2021 | 2022 | 2023 | | | | 2024 Thereafter |
| Foreign exchange contracts - United States dollar |
| forwards - sell (millions of USD) | 2 | | | | | | | 3 | 1 | — | | | | — | — |
| Interest rate contracts - short-term borrowings (millions |
| of Canadian dollars) | 455 | | | | | | | 387 | 18 | — | | | | — | — |
| Interest rate contracts - long-term debt (millions of |
| Canadian dollars) | — | | | | | | | 275 | — | — | | | | — | — |
12 |
| The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Comprehensive IncomeThe following table presents the effect of cash flow hedges on the Company’s consolidated earnings and comprehensive income, before the effect of income taxes. |
| | Three months ended |
| | | March 31, |
| | 2020 | | 2019 |
| (millions of Canadian dollars) |
| Amount of unrealized gain/(loss) recognized in OCI cash flow hedges |
| Interest rate contracts | | (56) | (34) |
| Foreign exchange contracts | | — | 1 |
| | | (56) | (33) |
| Amount of loss reclassified from AOCI to earnings |
| Interest rate contracts1 | | 2 | 1 |
| | | 2 | 1 |
| 1 Reported within Interest expense, net in the Consolidated Statements of Earnings. |
| The Company estimates a loss of $10 million of AOCI related to cash flow hedges will be reclassified to earnings in the next 12 months. Actual amounts reclassified to earnings depend on interest and foreign exchange rates in effect when derivative contracts that are currently outstanding mature. For all forecasted transactions, the maximum term over which the Company is hedging exposures to the variability of cash flows is 21 months as at March 31, 2020. |
| LIQUIDITY RISKLiquidity risk is the risk that the Company will not be able to meet its financial obligations, including commitments as they become due. In order to manage this risk, the Company forecasts cash requirements over a 12-month rolling time period to determine whether sufficient funds will be available. The Company’s primary sources of liquidity and capital resources are funds generated from operations, the issuance of commercial paper, draws under the committed credit facility and long-term debt, which includes debentures and MTNs and, if necessary, additional liquidity is available through intercompany transactions with its ultimate parent, Enbridge, and other related entities. These sources are expected to be sufficient to enable the Company to fund all anticipated requirements. The Company maintains a current MTN shelf prospectus with securities regulators, which enables ready access to the Canadian public capital markets, subject to market conditions. The Company also maintains a committed credit facility with a diversified group of banks and institutions. The Company is in compliance with all of the terms and conditions of its committed credit facility as at March 31, 2020. As a result, the credit facility is available to the Company and the banks are obligated to fund the Company under the terms of the facility. |
| CREDIT RISKCredit risk arises from the possibility that a counterparty will default on its contractual obligations. The Company is exposed to credit risk from accounts receivable and derivative financial instruments. Exposure to credit risk is mitigated by the Company's large and diversified customer base and the ability to recover an estimate for doubtful accounts for utility operations through the rate-making process. The Company actively monitors the financial strength of large industrial customers and, in select cases, has obtained additional security to minimize the risk of default of receivables. Generally, the Company classifies receivables older than 20 days as past due. The maximum exposure to credit risk related to non-derivative financial assets is their carrying value. |
| The Company’s policy requires that customers settle their billings in accordance with the payment terms listed on their bill, which generally require payment in full within 20 days. A provision for credit and recovery risk associated with accounts receivable has been made through the allowance for doubtful accounts, which totaled $45 million at March 31, 2020 (December 31, 2019 - $38 million). |
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| The allowance for doubtful accounts is determined based on historical credit losses by age of receivables, adjusted for any forward-looking information and management expectations, using a loss allowance matrix. This estimate is revised each reporting period to reflect current expectations. When the Company has determined that collection efforts are unlikely to be successful, amounts charged to the allowance for doubtful accounts are applied against the impaired accounts receivable. |
| Estimated costs associated with uncollectible accounts receivable are recovered through regulated distribution rates, which largely limits the Company’s exposure to credit risk related to accounts receivable, to the extent such estimates are accurate. |
| Entering into derivative financial instruments may also result in exposure to credit risk. The Company enters into risk management transactions primarily with institutions that possess investment grade credit ratings. Credit risk relating to derivative counterparties is mitigated by credit exposure limits and contractual requirements, frequent assessment of counterparty credit ratings and netting arrangements. As at March 31, 2020, the Company does not have any significant group credit concentrations andmaximum credit exposure, with respect to derivative instruments, in any counterparty segments. |
| Derivative assets are adjusted for non-performance risk of the Company’s counterparties using their credit default swap spread rates and are reflected in the fair value. For derivative liabilities, the Company’s non-performance risk is considered in the valuation. |
| FAIR VALUE MEASUREMENTSThe Company’s financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. The Company also discloses the fair value of other financial instruments not measured at fair value. The fair values of financial instruments reflects the Company’s best estimates of fair value based on generally accepted valuation techniques or models and are supported by observable market prices and rates. When such values are not available, the Company uses discounted cash flow analysis from applicable yield curves based on observable market inputs to estimate fair value. |
| FAIR VALUE OF FINANCIAL INSTRUMENTSThe Company categorizes its derivative instruments measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. |
| Level 1Level 1 includes derivatives measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for a derivative is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The Company does not have any derivative instruments classified as Level 1. |
| Level 2Level 2 includes derivative valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Derivatives in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the derivative. Derivatives valued using Level 2 inputs include non-exchange traded derivatives such as over-the-counter interest rate swaps for which observable inputs can be obtained. |
| Level 3Level 3 includes derivative valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the derivative’s fair value. Generally, Level 3 derivatives are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available, or have no binding broker quote to support a Level 2 classification. The |
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| Company has developed methodologies, benchmarked against industry standards, to determine fair value for these derivatives based on extrapolation of observable future prices and rates. The Company does not have any derivative instruments classified as Level 3. |
| The Company uses the most observable inputs available to estimate the fair value of its derivatives. When possible, the Company estimates the fair value of its derivatives based on quoted market prices. If quoted market prices are not available, the Company uses estimates from third party brokers. For non-exchange traded derivatives classified in Levels 2 and 3, the Company uses standard valuation techniques to calculate the estimated fair value. These methods include discounted cash flows for forwards and swaps. Depending on the type of derivative and the nature of the underlying risk, the Company uses observable market prices (interest, foreign exchange and natural gas) and volatility as primary inputs to these valuation techniques. Finally, the Company considers its own credit default swap spread as well as the credit default swap spreads associated with its counterparties in its estimation of fair value. |
| At March 31, 2020, the Company had Level 2 derivative assets with a fair value of nil (December 31, 2019 - nil) and Level 2 derivative liabilities with a fair value of $52 million (December 31, 2019 - $22 million). |
| FAIR VALUE OF OTHER FINANCIAL INSTRUMENTSThe fair value of the Company’s long-term debt is based on quoted market prices for instruments of similar yield, credit risk and tenor, and is classified as a Level 2 measurement. At March 31, 2020, the Company’s long-term debt, including the current portion had a carrying value of $7,895 million (December 31, 2019 - $7,895 million) before debt issue costs and a fair value of $8,874 million (December 31, 2019 - $9,182 million). |
| The fair value of other financial assets and liabilities other than derivative instruments and long-term debt approximate their cost due to the short period to maturity. |
| 8. INCOME TAXES |
| The effective income tax rate for the three months ended March 31, 2020 was 10.2% (2019 - 17.1%). The period-over-period decrease in the effective tax rate is primarily attributable to the effects of rate-regulated accounting for income taxes, relative to lower earnings in the first three months of 2020. |
| 9. PENSION AND OTHER POSTRETIREMENT BENEFITS |
| | Three months ended |
| | | March 31, |
| | 2020 | | 2019 |
| | | | | |
| (millions of Canadian dollars) |
| Service cost | | 17 | 16 |
| Interest cost | | 18 | 19 |
| Expected return on plan assets | | (34) | (32) |
| Amortization of actuarial loss | | 5 | 4 |
| Net periodic benefit costs | | 6 | 7 |
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| 10. CONTINGENCIES |
| The Company is subject to various legal and regulatory actions and proceedings which arise in the normal course of business, including interventions in regulatory proceedings and challenges to regulatory approvals and permits by special interest groups. While the final outcome of such actions and proceedings cannot be predicted with certainty, management believes that the resolution of such actions and proceedings will not have a material impact on the Company's interim consolidated financial position or results of operations. |
| TAX MATTERSThe Company maintains tax liabilities related to uncertain tax positions. While fully supportable in the Company's view, these tax positions, if challenged by tax authorities, may not be fully sustained on review. |
| 11. SUBSEQUENT EVENT |
| The spread of the COVID-19 pandemic has caused significant volatility in Canada, the United States and international markets. The Company continues to monitor the impact of the COVID-19 pandemic and reduced commodity prices on its results of operations. Given the many outstanding questions as to the length and depth of the COVID-19 pandemic and the current low commodity price environment, the impact on the Company is uncertain; however, it is possible that they may have an adverse impact on the Company's business and results of operations in the future. |
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