Enbridge owns 42.7% of Aux Sable, a NGLs extraction and fractionation business near Chicago. Aux Sable owns and operates a plant at the terminus of the Alliance System. The plant extracts NGLs from the energy-rich natural gas transported on the Alliance System, as necessary, to meet the heat content requirements of local distribution companies, which require natural gas with less NGLs, or lower heat content, and to take advantage of positive commodity price spreads.
Aux Sable has an agreement with BP Products North America Inc. to sell its NGLs production to BP. In return, BP pays Aux Sable a fixed annual fee and a share of any net margin generated from the business in excess of specified natural gas processing margin thresholds (the upside sharing mechanism). In addition, BP compensates Aux Sable for all operating, maintenance and capital costs associated with the Aux Sable facilities subject to certain limits on capital costs. BP supplies, at its cost, all make-up gas and fuel supply gas to the Aux Sable facilities and is responsible for the capacity on the Alliance Pipeline held by an Aux Sable affiliate, at market rates. The agreement is for an initial term of 20 years, commencing January 1, 2006 and may be extended by mutual agreement for 10-year terms. If cumulative losses exceed a certain limit, BP will have the option to terminate the agreement, although Aux Sable has the right to reduce such losses to avoid termination.
Results of Operations
Adjusted earnings for the year ended December 31, 2008 were $28.3 million compared with $10.6 million for the year ended December 31, 2007. Aux Sable adjusted earnings increased due to strong fractionation margins and enhanced plant performance, in addition to favourable risk management positions, which enabled the Company to recognize earnings from the upside sharing mechanism.
Aux Sable year-to-date earnings reflected unrealized fair value gains on derivative financial instruments used to risk manage the Company's 2009 share of the contingent upside sharing mechanism, which allows Aux Sable to share in natural gas processing margins in excess of certain thresholds. Similar to Energy Services, these non-cash, non-operating gains arose due to the revaluation of financial derivatives used to "lock in" the profitability of forward contracted prices.
Adjusted earnings for the year ended December 31, 2007 were $10.6 million compared with earnings of $25.8 million for the year ended December 31, 2006. The decrease was due to lower fractionation spreads in 2007 compared with 2006 as well as the weaker U.S. dollar.
Aux Sable's 2007 reported earnings included $28.1 million of unrealized derivative fair value losses related to the Company's share of 2008 contingent upside sharing revenue.