Enbridge (TSX:ENB)(NYSE:ENB) recently released its full-year 2020 earnings. They were surprisingly decent. For the full year, net income technically declined to $3 billion from $5.3 billion. But that was almost entirely due to non-recurring, non-cash factors. Cash from operating activities actually grew by $400 million, while adjusted earnings declined from $5.3 billion to $4.9 billion. Most importantly, distributable cash flow — the metric that shows the company’s ability to pay dividends — grew by $200 million. Broadly, these were encouraging metrics. GAAP earnings weren’t so great, but cash flow metrics were generally solid. For an energy company in the age of COVID-19, this is good news.
But before you get too excited, there is one looming danger you need to keep in mind. A major political headwind, it could jeopardize Enbridge’s current revenue stream. So far, this threat hasn’t materialized. But the political climate in the United States makes it a very real possibility.
The political situation unfolding in Michigan
Currently, the political situation in Michigan — where one of Enbridge’s pipelines runs — is not favourable to pipelines. Gov. Gretchen Whitmer recently revoked Enbridge’s Line 5 easement, which the company needs to operate in the state. If Whitmer’s order stands, then Enbridge will have to completely shut down its Line 5 operations in the state of Michigan. Of course, that order is subject to judicial review. Enbridge has the right to challenge it and has indicated that it will simply ignore the governor’s actions for the time being. Nevertheless, in a worst-case scenario, Enbridge could lose big.
Will the state get its way?
The million-dollar question pertaining to Line 5 is whether the Michigan government will get its way. The answer appears to be no. A state energy board already cleared Enbridge to do more construction on Line 5. On top of that, the state would need to prevail in court and then possibly in appeals court in order to have Line 5 shut down. Put simply, the state has more obstacles in front of it than Enbridge does. That doesn’t mean it can’t win though. Enbridge has generally won most of the U.S. lawsuits threatening its pipelines, but you never know when a judge will buck the trend.
Enbridge is currently one of the highest-yielding Canadian energy stocks. With a 7.6% yield at today’s prices, it throws off buckets of cash. That remains the case, even if its pipeline construction projects are halted. Enbridge’s dividend is well supported by cash flows from existing projects. So, even if the Line 3 replacement or Line 5 tunnel were struct down, the company’s dividend, at least, would be safe. The situation in Michigan throws a wrench in that analysis. If the governor succeeds in shutting down Enbridge’s already existing infrastructure, then even its dividend is not safe. So, this remains a situation for Enbridge investors to pay close attention to.