Enbridge Energy Partners
EEP owns and operates crude oil and liquid petroleum transmission pipeline systems, natural gas gathering and related facilities and marketing assets in the United States. Significant assets include the Lakehead System, which is the extension of the Enbridge System in the U.S., natural gas gathering and processing assets in Texas, the mid-continent crude oil system, various interstate and intrastate natural gas pipelines and a crude oil feeder pipeline in North Dakota.
Results of Operations
Adjusted earnings from EEP were $59.8 million for the year ended December 31, 2008, compared with $47.3 million for the year ended December 31, 2007. EEP adjusted earnings increased as a result of higher incentive income and increased earnings at EEP due to higher gas and crude oil delivery volumes, tariff surcharges for recent expansions and additional revenue resulting from higher average crude oil prices associated with allowance oil. These increases were partially offset by increased operating and administrative costs and write downs of natural gas inventory to fair market value as a result of declines in the price of natural gas. Also, the Company's ownership interest in EEP increased to 27.0% in December 2008.
EEP earnings were favourably impacted by dilution gains because Enbridge did not fully participate in EEP's Class A unit offerings and by a change in the unrealized fair value on derivative financial instruments. Also, 2008 earnings from EEP included non-routine costs associated with Hurricanes Gustav and Ike, of which Enbridge's share is $1.6 million, as well as the write-off of certain projects cancelled due to market conditions.
Adjusted earnings from EEP were $47.3 million for the year ended December 31, 2007 compared with $36.5 million for the year ended December 31, 2006 despite the stronger Canadian dollar. The increase in adjusted earnings reflects Enbridge's larger average ownership interest in 2007 as well as higher incentive income, increased processing margins and higher volumes on principal natural gas and liquids systems that were partially offset by higher operating expenses.
Non-operating adjusting items impacted EEP earnings for fiscal 2007 and 2006 as follows:
- Dilution gains resulting from Enbridge not fully participating in Class A unit issuances.
- Unrealized derivative fair value gains and losses (losses in 2007 of $6.3 million; gains in 2006 of $6.5 million).
- Enbridge's $3.0 million share of the gain on the sale of Kansas Pipeline Company (KPC).
In the third quarter of 2006, EEP issued new Class C units. Enbridge participated in the offering and no dilution gains resulted. The Class C unit issuance increased Enbridge's ownership interest in EEP from 10.9% to 16.6%. Enbridge's average ownership interest in 2006 was 13.0%. In the second quarter of 2007, EEP issued partnership units. Because Enbridge did not fully participate in these offerings, dilution gains of $11.8 million resulted and Enbridge's ownership interest in the Partnership decreased from 16.6% to 15.1%. Enbridge's average ownership interest in 2007 was 15.5%. In March 2008, Enbridge did not participate in EEP's issuance of Class A units, resulting in a $4.5 million dilution gain and a decrease in ownership interest to 14.6%. In late 2008, Enbridge purchased 16.3 million Class A common units of EEP, resulting in an ownership increase to 27.0%. The Company's average ownership interest in EEP during 2008 was 15.7%
EEP makes quarterly distributions of its available cash to its common unitholders, including Enbridge. Under the Partnership Agreement, Enbridge, as general partner (GP), receives incremental incentive cash distributions, which represent incentive income, on the portion of cash distributions, on a per unit basis, that exceed certain target thresholds as follows:
|Quarterly Cash Distributions per Unit:|
|Up to $0.59 per unit||98%||2%|
|First target $0.59 per unit up to $0.70 per unit||85%||15%|
|Second target $0.70 per unit up to $0.99 per unit||75%||25%|
|Over second target cash distributions greater than $0.99 per unit||50%||50%|
During 2006 EEP paid quarterly distributions of $0.925 per unit. In the first three quarters of 2007, EEP paid quarterly distributions of $0.925 per unit and effective November 2007, EEP increased quarterly distributions to $0.95 per unit. In the first two quarters of 2008 EEP paid quarterly distributions of $0.95 per unit and effective August 2008, EEP increased quarterly distributions to $0.99 per unit. Of the $75.7 million Enbridge recognized as earnings from EEP during 2008, 29% (2007 43%; 2006 37%) were general partner incentive earnings while 71% (2007 57%; 2006 63%) were Enbridge's limited partner share of EEP's earnings.