ITEM 1. FINANCIAL STATEMENTS
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and other services
|
$
|
500
|
|
|
$
|
569
|
|
|
$
|
1,059
|
|
|
$
|
1,149
|
|
Transportation and other services - affiliate
|
37
|
|
|
27
|
|
|
70
|
|
|
52
|
|
Total operating revenues
(Note 3)
|
537
|
|
|
596
|
|
|
1,129
|
|
|
1,201
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Environmental costs, net of recoveries
|
(23
|
)
|
|
4
|
|
|
(22
|
)
|
|
14
|
|
Operating and administrative
|
67
|
|
|
84
|
|
|
136
|
|
|
162
|
|
Operating and administrative - affiliate
|
68
|
|
|
74
|
|
|
131
|
|
|
150
|
|
Power
|
75
|
|
|
66
|
|
|
152
|
|
|
140
|
|
Depreciation and amortization
|
109
|
|
|
108
|
|
|
219
|
|
|
217
|
|
Impairment of long-lived asset
(Note 6)
|
1
|
|
|
—
|
|
|
36
|
|
|
—
|
|
Gain on sale of assets
(Note 6)
|
—
|
|
|
(51
|
)
|
|
—
|
|
|
(62
|
)
|
Total operating expenses
|
297
|
|
|
285
|
|
|
652
|
|
|
621
|
|
Operating income
|
240
|
|
|
311
|
|
|
477
|
|
|
580
|
|
Interest expense, net
|
101
|
|
|
103
|
|
|
205
|
|
|
202
|
|
Allowance for equity used during construction
|
16
|
|
|
11
|
|
|
32
|
|
|
21
|
|
Income from equity investment in joint venture
(Note 7)
|
33
|
|
|
6
|
|
|
56
|
|
|
6
|
|
Other income (expense)
|
(1
|
)
|
|
5
|
|
|
(1
|
)
|
|
5
|
|
Income from continuing operations before income taxes
|
187
|
|
|
230
|
|
|
359
|
|
|
410
|
|
Income tax benefit
|
—
|
|
|
2
|
|
|
—
|
|
|
1
|
|
Income from continuing operations
|
187
|
|
|
232
|
|
|
359
|
|
|
411
|
|
Loss from discontinued operations, net of taxes
(Note 6)
|
—
|
|
|
(35
|
)
|
|
—
|
|
|
(57
|
)
|
Net income
|
187
|
|
|
197
|
|
|
359
|
|
|
354
|
|
Noncontrolling interests
(Note 9)
|
(92
|
)
|
|
(91
|
)
|
|
(190
|
)
|
|
(159
|
)
|
Series 1 preferred unit distributions
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(29
|
)
|
Accretion of discount on Series 1 preferred units
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(8
|
)
|
Net income - controlling interests
|
$
|
95
|
|
|
$
|
93
|
|
|
$
|
169
|
|
|
$
|
158
|
|
Net income allocable to common units and i-units:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
83
|
|
|
$
|
105
|
|
|
$
|
145
|
|
|
$
|
172
|
|
Loss from discontinued operations
(Note 4)
|
—
|
|
|
(24
|
)
|
|
—
|
|
|
(38
|
)
|
Net income allocable to common units and i-units
|
$
|
83
|
|
|
$
|
81
|
|
|
$
|
145
|
|
|
$
|
134
|
|
Net income per common unit and i-unit (basic and diluted):
|
|
|
|
|
|
|
|
Income from continuing operations
(Note 4)
|
$
|
0.19
|
|
|
$
|
0.27
|
|
|
$
|
0.34
|
|
|
$
|
0.46
|
|
Loss from discontinued operations
(Note 4)
|
—
|
|
|
(0.06
|
)
|
|
—
|
|
|
(0.10
|
)
|
Net income per common unit and i-unit (Note 4)
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
Weighted average common units and i-units outstanding (basic and diluted)
|
428
|
|
|
400
|
|
|
427
|
|
|
377
|
|
Cash Distributions paid per limited partner unit
|
$
|
0.350
|
|
|
$
|
0.350
|
|
|
$
|
0.700
|
|
|
$
|
0.933
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
187
|
|
|
$
|
197
|
|
|
$
|
359
|
|
|
$
|
354
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
Change in cash flow hedges
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(21
|
)
|
Reclassification to income on cash flow hedges
|
8
|
|
|
10
|
|
|
20
|
|
|
21
|
|
Other comprehensive income (loss), net of tax
|
8
|
|
|
(9
|
)
|
|
20
|
|
|
—
|
|
Comprehensive income
|
195
|
|
|
188
|
|
|
379
|
|
|
354
|
|
Comprehensive income attributable to noncontrolling interests
|
(92
|
)
|
|
(91
|
)
|
|
(190
|
)
|
|
(159
|
)
|
Series 1 preferred unit distributions
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(29
|
)
|
Accretion of discount on Series 1 preferred units
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(8
|
)
|
Comprehensive income attributable to common units and i-units
|
$
|
103
|
|
|
$
|
84
|
|
|
$
|
189
|
|
|
$
|
158
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
Operating activities:
|
|
|
|
|
Income from continuing operations
|
$
|
359
|
|
|
$
|
411
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
219
|
|
|
217
|
|
Changes in unrealized (gain) loss on derivative instruments, net
|
7
|
|
|
(1
|
)
|
Environmental costs, net of recoveries
|
(22
|
)
|
|
14
|
|
Distributions from equity investment in joint venture
|
56
|
|
|
—
|
|
Income from equity investment in joint venture
(Note 7)
|
(56
|
)
|
|
(6
|
)
|
Gain on sale of assets
(Note 6)
|
—
|
|
|
(62
|
)
|
Allowance for equity used during construction
|
(32
|
)
|
|
(21
|
)
|
Amortization of debt issuance and hedging costs
|
17
|
|
|
19
|
|
Impairment of long-lived asset
(Note 6)
|
36
|
|
|
—
|
|
Other
|
1
|
|
|
(2
|
)
|
Changes in operating assets and liabilities
|
31
|
|
|
(354
|
)
|
Net cash provided by operating activities
|
616
|
|
|
215
|
|
Net cash used in discontinued operations
|
—
|
|
|
(171
|
)
|
|
|
|
|
Investing activities:
|
|
|
|
Capital expenditures
|
(333
|
)
|
|
(229
|
)
|
Proceeds from the sale of assets
|
—
|
|
|
314
|
|
Proceeds from the sale of Midcoast assets
(Note 6)
|
—
|
|
|
1,310
|
|
Equity investment in joint venture
|
(4
|
)
|
|
(1,557
|
)
|
Distributions from equity investment in joint venture in excess of cumulative earnings
|
40
|
|
|
—
|
|
Other
|
—
|
|
|
(3
|
)
|
Net cash used in investing activities
|
(297
|
)
|
|
(165
|
)
|
Net cash used in discontinued operations
|
—
|
|
|
(25
|
)
|
|
|
|
|
Financing activities:
|
|
|
|
Redemption of Series 1 Preferred Units
(Note 10)
|
—
|
|
|
(1,200
|
)
|
Payment of Series 1 Preferred Unit dividends
(Note 10)
|
—
|
|
|
(357
|
)
|
Net proceeds from Class A common unit issuances
(Note 10)
|
—
|
|
|
1,225
|
|
Distributions to partners
|
(260
|
)
|
|
(346
|
)
|
Repayments to General Partner and affiliates
|
(157
|
)
|
|
(1,829
|
)
|
Borrowings from General Partner and affiliates
|
297
|
|
|
1,500
|
|
Net borrowings (repayments) under credit facilities
(Note 8)
|
175
|
|
|
(865
|
)
|
Net commercial paper borrowings
(Note 8)
|
91
|
|
|
676
|
|
Repayment of long-term debt
(Note 8)
|
(400
|
)
|
|
—
|
|
Acquisition of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
(360
|
)
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
450
|
|
Contributions from noncontrolling interests
|
165
|
|
|
1,285
|
|
Distributions to noncontrolling interests
|
(254
|
)
|
|
(219
|
)
|
Other
|
(2
|
)
|
|
(1
|
)
|
Net cash used in financing activities
|
(345
|
)
|
|
(41
|
)
|
Net cash provided by discontinued operations
|
—
|
|
|
229
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents and restricted cash - continuing operations
|
(26
|
)
|
|
9
|
|
Net increase in cash and cash equivalents and restricted cash - discontinued operations
|
—
|
|
|
33
|
|
Cash disposed as part of the Midcoast sale
|
—
|
|
|
(51
|
)
|
Cash and cash equivalents and restricted cash at beginning of year - continuing operations
|
35
|
|
|
115
|
|
Cash and cash equivalents and restricted cash at beginning of year - discontinued operations
|
—
|
|
|
18
|
|
Cash and cash equivalents and restricted cash at end of period - continuing operations
|
$
|
9
|
|
|
$
|
124
|
|
Cash and cash equivalents and restricted cash at end of period - discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited; in millions, except number of Class F units)
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
9
|
|
|
$
|
35
|
|
Receivables, trade and other
|
52
|
|
|
65
|
|
Due from General Partner and affiliates
|
107
|
|
|
101
|
|
Accrued receivables
|
91
|
|
|
105
|
|
Other current assets
|
30
|
|
|
24
|
|
|
289
|
|
|
330
|
|
Property, plant and equipment, net
|
12,978
|
|
|
12,896
|
|
Equity investment in joint venture
(Note 7)
|
1,530
|
|
|
1,565
|
|
Other assets, net
|
38
|
|
|
37
|
|
Total assets
|
$
|
14,835
|
|
|
$
|
14,828
|
|
LIABILITIES AND PARTNERS’ CAPITAL
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable and other
|
$
|
188
|
|
|
$
|
173
|
|
Due to General Partner and affiliates
|
51
|
|
|
48
|
|
Interest payable
|
81
|
|
|
85
|
|
Environmental liabilities
|
17
|
|
|
23
|
|
Property and other taxes payable
|
87
|
|
|
106
|
|
Current portion of long-term debt
|
600
|
|
|
500
|
|
|
1,024
|
|
|
935
|
|
Long-term debt
|
6,133
|
|
|
6,366
|
|
Loans from General Partner and affiliate
|
750
|
|
|
610
|
|
Other long-term liabilities
|
158
|
|
|
178
|
|
|
8,065
|
|
|
8,089
|
|
Commitments and contingencies
(Note 12)
|
|
|
|
|
|
Partners’ capital:
|
|
|
|
Class E units (18.1 authorized and issued at June 30, 2018 and December 31, 2017, respectively)
|
774
|
|
|
774
|
|
Class A common units (326.5 outstanding at June 30, 2018 and December 31, 2017, respectively)
|
614
|
|
|
860
|
|
Class B common units (7.8 authorized and issued at June 30, 2018 and December 31, 2017, respectively)
|
—
|
|
|
—
|
|
i-units (95.5 and 89.8 authorized and issued at June 30, 2018 and December 31, 2017, respectively)
|
—
|
|
|
—
|
|
Class F units (1,000 authorized and issued at June 30, 2018 and December 31, 2017, respectively)
|
267
|
|
|
267
|
|
General Partner
|
224
|
|
|
68
|
|
Accumulated other comprehensive loss
|
(179
|
)
|
|
(199
|
)
|
Total Enbridge Energy Partners, L.P. partners’ capital
|
1,700
|
|
|
1,770
|
|
Noncontrolling interests
|
5,070
|
|
|
4,969
|
|
Total Partners’ capital
|
6,770
|
|
|
6,739
|
|
Total Liabilities and Partners’ capital
|
$
|
14,835
|
|
|
$
|
14,828
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(unaudited; in millions)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
Series 1 Preferred units:
|
|
|
|
|
|
Beginning balance
|
$
|
—
|
|
|
$
|
1,192
|
|
Redemption of preferred units
(Note 10)
|
—
|
|
|
(1,200
|
)
|
Net income
|
—
|
|
|
29
|
|
Distribution payable
|
—
|
|
|
(29
|
)
|
Accretion of discount on preferred units
|
—
|
|
|
8
|
|
Ending balance
|
—
|
|
|
—
|
|
Class D units:
|
|
|
|
Beginning balance
|
—
|
|
|
2,518
|
|
Waiver of Class D units
(Note 10)
|
—
|
|
|
(2,479
|
)
|
Distributions
|
—
|
|
|
(39
|
)
|
Ending balance
|
—
|
|
|
—
|
|
Class E units:
|
|
|
|
Beginning balance
|
774
|
|
|
778
|
|
Net income
|
13
|
|
|
13
|
|
Distributions
|
(13
|
)
|
|
(17
|
)
|
Ending balance
|
774
|
|
|
774
|
|
Class A common units:
|
|
|
|
Beginning balance
|
860
|
|
|
—
|
|
Net income (loss)
|
(19
|
)
|
|
150
|
|
Issuance of Class A units
(Note 10)
|
—
|
|
|
1,200
|
|
Distributions
|
(229
|
)
|
|
(267
|
)
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
29
|
|
Other
|
2
|
|
|
—
|
|
Ending balance
|
614
|
|
|
1,112
|
|
Class B common units:
|
|
|
|
Net income
|
6
|
|
|
6
|
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
1
|
|
Distributions
|
(6
|
)
|
|
(7
|
)
|
Ending balance
|
—
|
|
|
—
|
|
i-units:
|
|
|
|
Net loss
|
—
|
|
|
(9
|
)
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
9
|
|
Ending balance
|
—
|
|
|
—
|
|
Class F units:
|
|
|
|
Beginning balance
|
267
|
|
|
—
|
|
Issuance of Class F units
(Note 10)
|
—
|
|
|
263
|
|
Net income
|
8
|
|
|
7
|
|
Distributions
|
(8
|
)
|
|
(3
|
)
|
Ending balance
|
267
|
|
|
267
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL - (continued)
(unaudited; millions of dollars)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
Incentive distribution units:
|
|
|
|
|
|
Beginning balance
|
—
|
|
|
495
|
|
Waiver of incentive distribution units
(Note 10)
|
—
|
|
|
(490
|
)
|
Distributions
|
—
|
|
|
(5
|
)
|
Ending balance
|
—
|
|
|
—
|
|
General Partner:
|
|
|
|
Beginning balance
|
68
|
|
|
(667
|
)
|
Net income (loss)
|
161
|
|
|
(9
|
)
|
Waiver of Class D units and incentive distribution units
(Note 10)
|
—
|
|
|
2,969
|
|
Issuance of Class F units
(Note 10)
|
—
|
|
|
(263
|
)
|
Contributions
|
—
|
|
|
25
|
|
Sale of Midcoast assets
(Note 6)
|
—
|
|
|
(2,127
|
)
|
Distributions
|
(5
|
)
|
|
(7
|
)
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
1
|
|
Ending balance
|
224
|
|
|
(78
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
Beginning balance
|
(199
|
)
|
|
(339
|
)
|
Changes in fair value of derivative financial instruments recognized in other comprehensive income
|
—
|
|
|
(21
|
)
|
Changes in fair value of derivative financial instruments reclassified to income
|
20
|
|
|
21
|
|
Ending balance
|
(179
|
)
|
|
(339
|
)
|
Noncontrolling interests:
|
|
|
|
Beginning balance
|
4,969
|
|
|
3,846
|
|
Capital contributions
|
165
|
|
|
1,305
|
|
Sale of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
411
|
|
Acquisition of noncontrolling interest in subsidiary
(Note 11)
|
—
|
|
|
(360
|
)
|
Sale of Midcoast assets
(Note 6)
|
—
|
|
|
(297
|
)
|
Net income
|
190
|
|
|
159
|
|
Distributions to noncontrolling interests
|
(254
|
)
|
|
(219
|
)
|
Ending balance
|
5,070
|
|
|
4,845
|
|
Total Partners’ Capital at end of period
|
$
|
6,770
|
|
|
$
|
6,581
|
|
_____________________
The accompanying notes are an integral part of these consolidated financial statements.
ENBRIDGE ENERGY PARTNERS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. GENERAL
The terms “we,” “our,” “us” and “Enbridge Energy Partners” as used in this report refer collectively to Enbridge Energy Partners, L.P. and its subsidiaries unless the context suggests otherwise. Those terms are used for convenience only and are not intended as a precise description of any separate legal entity within Enbridge Energy Partners.
Nature of Operations
We, together with our consolidated subsidiaries, provide crude oil and liquid petroleum gathering, transportation and storage services. In June 2017, we sold all of our ownership interest in our Midcoast gas gathering and processing business to our General Partner (the Midcoast Sale), which is an indirect wholly-owned subsidiary of Enbridge Inc. The sale of this ownership interest represented a strategic shift in our business and met the criteria for classification as discontinued operations, which resulted in the results of operations, cash flows and financial position of our natural gas business for the prior periods being reflected as discontinued operations. For further information refer to
Note 6 - Asset Held for Sale, Dispositions and Discontinued Operations
.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), for interim consolidated financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all the information and notes required by U.S. GAAP for annual consolidated financial statements and should therefore be read in conjunction with our annual consolidated financial statements and notes presented in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the interim consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our 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 our annual consolidated financial statements for the year ended December 31, 2017, except for the adoption of new standards.
Our operations and earnings for interim periods can be affected by seasonal fluctuations in the supply of and the demand for crude oil, as well as other factors such as the timing and completion of our construction projects, the effect of environmental costs and related insurance recoveries on our Lakehead System, the impact of forward commodity prices and differentials on derivative financial instruments that are accounted for at fair value and may not be indicative of annual results.
2. CHANGES IN ACCOUNTING POLICIES
Adoption of New Standards
Clarifying Guidance on Derecognition and Partial Sales of Nonfinancial Assets
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2017-05 on a modified retrospective basis. The new standard clarifies the scope provisions of nonfinancial assets and how to allocate consideration to each distinct asset upon sale or partial sale and amends the guidance for derecognition of a distinct nonfinancial asset in partial sale transactions so that an in-scope partial sale results in the recognition of a full gain or loss. The adoption of this accounting update did not have a material impact on our consolidated financial statements.
Clarifying the Presentation of Restricted Cash in the Statement of Cash Flows
Effective January 1, 2018, we adopted ASU 2016-18 on a retrospective basis. The new standard clarifies guidance on the classification and presentation of changes in restricted cash and restricted cash equivalents within the statement of cash flows. The amendments require that changes in restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the opening and closing period amounts shown on the statement of cash flows. For current and comparative periods, we amended the presentation in our consolidated statements of cash flows to include restricted cash and restricted cash equivalents with cash and cash equivalents.
Simplifying Cash Flow Classification
Effective January 1, 2018, we adopted ASU 2016-15 on a retrospective basis. The new standard reduces diversity in practice of how certain cash receipts and cash payments are classified in the statements of cash flows. The new guidance addresses eight specific presentation issues. We assessed each of the eight specific presentation issues and the adoption of this ASU did not have a material impact on our consolidated financial statements.
Revenues from Contracts with Customers
Effective January 1, 2018, we adopted ASU 2014-09 on a modified retrospective basis to contracts that were not yet completed at the date of initial application. The new standard was issued with the intent of significantly enhancing consistency and comparability of revenue recognition practices across entities and industries. The new standard establishes a single, principles-based five-step model to be applied to all contracts with customers and introduces new and enhanced disclosure requirements. It also requires the use of more estimates and judgments, as well as additional disclosures. The adoption of this new standard did not have a material impact on our consolidated financial statements, see
Note 3 - Revenue
for further details.
Future Accounting Policy Changes
Improvements to Accounting for Hedging Activities
ASU 2017-12 was issued in August 2017 with the objective of better aligning an organization's risk management activities and the resulting hedge accounting reflected in the financial statements. The amendments allow cash flow hedging of contractually specified components in financial and non-financial items. Under the new guidance, hedge ineffectiveness is no longer required to be measured and hedging instruments’ fair value changes will be recorded in the same income statement line as the hedged item. The ASU also allows the initial quantitative hedge effectiveness assessment to be performed at any time before the end of the quarter in which the hedge is designated. After initial quantitative testing is performed, an ongoing qualitative effectiveness assessment is permitted. The accounting update is effective January 1, 2019, with early adoption permitted and is to be applied on a modified retrospective basis. We are currently assessing the impact of the new standard on the consolidated financial statements.
Accounting for Credit Losses
ASU 2016-13 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. Current treatment uses the incurred loss methodology for recognizing credit losses that delays the recognition until it is probable a loss has 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 will recognize as an allowance its estimate of expected credit losses, which the Financial Accounting Standards Board believes will result in more timely recognition of such losses. The accounting update is effective January 1, 2020. We are currently assessing the impact of the new standard on our consolidated financial statements.
Recognition of Leases
ASU 2016-02 was issued in February 2016 with the intent to increase transparency and comparability among organizations. It requires lessees of operating lease arrangements to recognize lease assets and lease liabilities on the statement of financial position and disclose additional key information about lease agreements. The accounting update also replaces the current definition of a lease and requires that an arrangement be recognized as a lease when a customer has the right to obtain substantially all of the economic benefits from the use of an asset, as well as the right to direct the use of the asset. We will adopt the new standard on January 1, 2019 and we intend to apply the transition practical expedients offered in connection with this update. The election to apply the package of practical expedients allows an entity to not apply the new lease standard to the prior year comparative periods in the year of adoption. Application of the package of practical expedients permits entities not to reassess whether any expired or existing contracts contain leases, their lease classification, as well as any related initial direct costs.
Further, ASU 2018-01 was issued in January 2018 to address stakeholder concerns about the costs and complexity of complying with the transition provisions of the new lease requirements as they relate to land easements. The amendments provide an optional transition practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under existing guidance. We intend to elect this practical expedient in connection with the adoption of the new lease requirements.
We have substantially completed the process of identifying existing lease contracts and are currently performing detailed evaluations of our leases under the new accounting requirements. We believe the most significant changes to our financial statements relate to the recognition of a lease liability and offsetting right-of-use asset in our consolidated
statements of financial position for operating leases. We continue to assess the necessary changes to accounting and business processes in order to implement the recognition and disclosure requirements of the new lease standard.
3. REVENUE
Revenues from Contracts with Customers
Major Products and Services
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2018
|
|
(in millions)
|
Operating revenues:
|
|
|
|
Transportation
|
$
|
519
|
|
|
$
|
1,090
|
|
Storage and other
|
25
|
|
|
49
|
|
Total revenues from contracts with customers
|
544
|
|
|
1,139
|
|
Other
|
(7
|
)
|
|
(10
|
)
|
Total revenues
|
$
|
537
|
|
|
$
|
1,129
|
|
Recognition and Measurement of Revenue
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30, 2018
|
|
2018
|
|
2018
|
|
(in millions)
|
Revenues from products and services transferred over time - crude oil pipeline transportation and storage
|
$
|
544
|
|
|
$
|
1,139
|
|
Payment terms
Payments are received monthly from customers under long-term transportation contracts.
Contract balances
Contract assets represent the amount of revenue which has been recognized in advance of payments received for performance obligations we have fulfilled (or partially fulfilled) and prior to the point in time at which our right to the payment is unconditional. Amounts included in contract assets are transferred to accounts receivable when our right to the consideration becomes unconditional.
Contract liabilities represent payments received for performance obligations which have not been fulfilled. Contract liabilities primarily relate to make-up rights.
We had Receivables balances of
$255 million
and
$217 million
at January 1, 2018 and June 30, 2018, respectively. At June 30, 2018, we had no material contract assets and
$4 million
in contract liabilities.
Revenues to be Recognized from Unfulfilled Performance Obligations
Total revenues from performance obligations expected to be fulfilled in future periods is
$567 million
, of which
$62 million
and
$128 million
are expected to be recognized during the remaining six months ending
December 31, 2018
and for the year ended December 31, 2019, respectively.
Certain revenues such as flow-through operating costs charged to shippers are recognized at the amount for which we have the right to invoice our customers. Those revenues are not included in the amounts for revenues to be recognized in the future from unfulfilled performance obligations above. Variable consideration is excluded from the amounts above due to the uncertainty of the associated consideration, which is generally resolved when actual volumes and prices are determined. Additionally, the effect of escalation on certain tolls which are contractually escalated for inflation has not been reflected in the amounts above as it is not possible to reliably estimate future inflation rates. Finally, revenues from contracts with customers which have an original expected duration of one year or less are excluded from the amounts above.
Significant Judgments made in Recognizing Revenues
Judgment is required in estimating variable consideration for volumetric transportation and sales contracts. We estimate variable consideration for these contracts as the most likely amount based on actual volumes transported and delivered when those quantities are determined at the conclusion of each month using metered volumes and actual average monthly index prices for commodity sales contracts.
4. NET INCOME PER LIMITED PARTNER UNIT
We determined basic and diluted net income per limited partner unit as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions, except per unit amounts)
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
187
|
|
|
$
|
232
|
|
|
$
|
359
|
|
|
$
|
411
|
|
Noncontrolling interests
|
(92
|
)
|
|
(102
|
)
|
|
(190
|
)
|
|
(178
|
)
|
Series 1 preferred unit distributions
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(29
|
)
|
Accretion of discount on Series 1 preferred units
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(8
|
)
|
Net income - continuing operations
|
95
|
|
|
117
|
|
|
169
|
|
|
196
|
|
Distributions:
|
|
|
|
|
|
|
|
Incentive distributions to Class F units
|
(4
|
)
|
|
(4
|
)
|
|
(8
|
)
|
|
(8
|
)
|
Distributed earnings attributed to our General Partner
|
(3
|
)
|
|
(3
|
)
|
|
(6
|
)
|
|
(6
|
)
|
Distributed earnings attributed to Class E units
|
(6
|
)
|
|
(6
|
)
|
|
(13
|
)
|
|
(13
|
)
|
Total distributed earnings to our General Partner, Class E and Class F units
|
(13
|
)
|
|
(13
|
)
|
|
(27
|
)
|
|
(27
|
)
|
Total distributed earnings attributed to our common units and i-units
|
(151
|
)
|
|
(147
|
)
|
|
(300
|
)
|
|
(293
|
)
|
Total distributed earnings
|
(164
|
)
|
|
(160
|
)
|
|
(327
|
)
|
|
(320
|
)
|
Overdistributed earnings
|
$
|
(69
|
)
|
|
$
|
(43
|
)
|
|
$
|
(158
|
)
|
|
$
|
(124
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
Net loss
|
$
|
—
|
|
|
$
|
(35
|
)
|
|
$
|
—
|
|
|
$
|
(57
|
)
|
Noncontrolling interest
|
—
|
|
|
11
|
|
|
—
|
|
|
19
|
|
Net loss – discontinued operations
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
—
|
|
|
$
|
(38
|
)
|
Weighted average common units and i-units outstanding
|
428
|
|
|
400
|
|
|
427
|
|
|
377
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per unit:
|
|
|
|
|
|
|
|
|
|
Distributed earnings per common unit and i-unit - continuing operations
(1)
|
$
|
0.35
|
|
|
$
|
0.37
|
|
|
$
|
0.70
|
|
|
$
|
0.78
|
|
Overdistributed earnings per common unit and i-unit
(2)
|
(0.16
|
)
|
|
(0.10
|
)
|
|
(0.36
|
)
|
|
(0.32
|
)
|
Net income per common unit and i-unit (basic and diluted) - continuing operations
(3)
|
0.19
|
|
|
0.27
|
|
|
0.34
|
|
|
0.46
|
|
Net loss per common unit and i-unit (basic and diluted) - discontinued operations
(3)
|
—
|
|
|
(0.06
|
)
|
|
—
|
|
|
(0.10
|
)
|
Net income per common unit and i-unit (basic and diluted)
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
_____________________
|
|
(1)
|
Represents the total distributed earnings to common units and i-units divided by the weighted average number of common units and i-units outstanding for the period.
|
|
|
(2)
|
Represents the common units’ and i-units’ share (
98%
) of distributions in excess of earnings divided by the weighted average number of common units and i-units outstanding for the period and overdistributed earnings allocated to the common units and i-units based on the distribution waterfall that is outlined in our partnership agreement.
|
|
|
(3)
|
For the
three and six
months ended
June 30, 2018
,
18.1 million
anti-dilutive Class E units were excluded from the if-converted method of calculating diluted earnings per share. For the three months ended
June 30, 2017
,
18.1 million
anti-dilutive Class E units were excluded from the if-converted method of calculating diluted earnings per share. For the
six
months ended
June 30, 2017
,
43.2 million
anti-dilutive Preferred units and
18.1 million
anti-dilutive Class E units were excluded from the if-converted method of calculating diluted earnings per unit and
66.1 million
of Class D units were excluded from the if-converted method of calculating diluted earnings per unit as the General Partner irrevocably waived all of its rights associated with the Class D units effective April 27, 2017.
|
5. REGULATORY MATTERS
Regulatory Accounting
Our over and under recovery revenue adjustments and net regulatory asset amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Net regulatory (liability) asset balance at beginning of period
|
$
|
(11
|
)
|
|
$
|
(34
|
)
|
|
$
|
3
|
|
|
$
|
12
|
|
Prior period true-up
|
—
|
|
|
—
|
|
|
4
|
|
|
(5
|
)
|
Current period (over) under recovery revenue adjustments
|
(21
|
)
|
|
12
|
|
|
(37
|
)
|
|
(27
|
)
|
Amortization of prior year regulatory asset
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Net regulatory liability balance at end of period
|
$
|
(34
|
)
|
|
$
|
(24
|
)
|
|
$
|
(34
|
)
|
|
$
|
(24
|
)
|
6. ASSET HELD FOR SALE, DISPOSITIONS AND DISCONTINUED OPERATIONS
Asset Held for Sale
During the first quarter of 2018, we satisfied the conditions as set out in our agreements for the sale of our Line 10 crude oil pipeline, a component of our Lakehead System. Line 10 originates near Hamilton, Ontario and terminates at West Seneca, New York. We own the United States portion of Line 10, while a subsidiary of the indirect parent of our General Partner, Enbridge Inc., (Enbridge) owns the Canadian portion.
We expect to close the sale of Line 10 within one year, subject to regulatory approval and certain closing conditions. As such, we classified our portion of Line 10 assets as held for sale and measured them at the lower of their carrying value or fair value less costs to sell, which resulted in a loss of
$36 million
included within “Impairment of long-lived asset” on our consolidated statements of income for the six months ended June 30, 2018. The remaining held for sale assets and liabilities were not material.
Dispositions
During the second quarter of 2017, we sold unnecessary pipe related to the Sandpiper Project for cash proceeds of approximately
$98 million
. A gain on disposition of
$51 million
was included in "Gain on sale of assets" on our consolidated statements of income.
In March 2017, we completed the sale of the Ozark Pipeline to a subsidiary of MPLX LP for cash proceeds of approximately
$220 million
, including reimbursement costs. A gain on disposition of
$11 million
was included in “Gain on sale of assets” on our consolidated statements of income.
Discontinued Operations
Sale of Natural Gas Business
In June 2017, we completed the sale of all of our ownership interest in our Midcoast gas gathering and processing business to our General Partner for
$2.3 billion
, which included cash consideration of
$1.3 billion
and outstanding indebtedness at Midcoast Energy Partners, L.P. (MEP) of
$953 million
. This sale included our
48.4%
limited partnership interest in Midcoast Operating, L.P., our
51.9%
limited partnership interest in MEP, and our
100%
interest in Midcoast Holdings, L.L.C., MEP’s general partner. We recorded no gain or loss on the sale as this transaction was between entities under common control of Enbridge. The carrying value of the net assets sold was
$4.3 billion
. As a result of the transaction, partners’ capital decreased by
$2.1 billion
, all of which was allocated to the General Partner’s capital account. Noncontrolling interest (NCI) in MEP of
$297 million
was eliminated.
The following table presents the operating results from discontinued operations of our Midcoast gas gathering and processing business, which have been segregated from our continuing operations in our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2017
|
|
2017
|
|
(in millions)
|
Operating revenues
|
$
|
587
|
|
|
$
|
1,161
|
|
Operating expenses:
|
|
|
|
Commodity costs
|
523
|
|
|
1,011
|
|
Operating and administrative
|
63
|
|
|
133
|
|
Depreciation and amortization
|
37
|
|
|
74
|
|
|
623
|
|
|
1,218
|
|
Operating loss
|
(36
|
)
|
|
(57
|
)
|
Interest expense, net
|
9
|
|
|
17
|
|
Other income
|
10
|
|
|
18
|
|
Loss before income taxes
|
(35
|
)
|
|
(56
|
)
|
Income tax expense
|
—
|
|
|
(1
|
)
|
Loss from discontinued operations, net of taxes
|
$
|
(35
|
)
|
|
$
|
(57
|
)
|
7. EQUITY INVESTMENT IN JOINT VENTURE
The following table presents our equity investment in a joint venture and ownership interest in MarEn Bakken Company LLC (MarEn).
|
|
|
|
|
|
|
|
Ownership
Interest
|
|
June 30,
2018
|
|
December 31,
2017
|
|
|
|
(in millions)
|
MarEn Bakken Company LLC
|
75%
|
|
$1,530
|
|
$1,565
|
In February 2017, our joint venture with Marathon Petroleum Corporation (MPC), MarEn, closed its acquisition to acquire a
49%
interest in Bakken Pipeline Investments LLC (BPI). BPI owns
75%
of the Dakota Access Pipeline (DAPL) and the Energy Transfer Crude Oil Pipeline (ETCOP), collectively the Bakken Pipeline System. The Bakken Pipeline System was placed into service June 1, 2017. Our investment subsidiary, Enbridge Holdings (DakTex) L.L.C. (DakTex) and MPC indirectly hold
75%
and
25%
interests, respectively, of MarEn. The purchase of DakTex's effective
27.6%
interest in the Bakken Pipeline System was
$1.5 billion
and funded through a bridge loan from Enbridge (U.S.) Inc., (EUS) an affiliate of our General Partner and was re-paid and terminated on April 27, 2017, as a result of the finalization by our Board of Directors of a joint funding arrangement with our General Partner. This arrangement resulted in DakTex now being owned
75%
by our General Partner and
25%
by us. Refer to
Note 11 - Related Party Transactions
for further details on our joint funding arrangements.
We account for our investment in MarEn under the equity method of accounting. For the
three and six
months ended
June 30, 2018
, we recognized
$33 million
and
$56 million
, respectively and
$6 million
for the
six
months ended
June 30, 2017
, in “Income from equity investment in joint venture" in our consolidated statements of income representing our equity earnings for this investment, net of amortization of the excess of the purchase price over the underlying net book value (basis difference).
ENBRIDGE ENERGY PARTNERS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Our equity investment includes basis difference of the investees’ assets at the purchase date, which is comprised of
$14 million
in goodwill and
$931 million
in amortizable assets. We amortized
$9 million
and
$19 million
, respectively, for the
three and six
months ended
June 30, 2018
and
$3 million
for the
six
months
June 30, 2017
, which was recorded as a reduction to equity earnings.
8. DEBT
Credit Facilities
|
|
|
|
|
|
|
|
|
|
Maturity
Dates
(1)
|
|
Total Facilities
(2)
|
|
Draws
(3)
|
|
Available
|
|
(in millions)
|
Enbridge Energy Partners, L.P.
|
2019 – 2022
|
|
$2,625
|
|
$1,719
|
|
$906
|
_______________________
|
|
(1)
|
Includes
$175 million
and
$185 million
of commitments that expire in 2018 and 2020, respectively.
|
|
|
(2)
|
Includes our
$2.0 billion
multi-year revolving credit facility (Credit Facility) and our
$625 million
credit agreement (364-Day Credit Facility), together (the Credit Facilities).
|
|
|
(3)
|
Includes facility draws, letters of credit and commercial paper issuances that are back-stopped by the credit facility and excludes our unsecured revolving 364-day credit agreement with EUS (the EUS 364-day Credit Facility).
|
Our commercial paper program provides for the issuance of up to an aggregate principal amount of
$1.5 billion
of commercial paper and is supported by the availability of long-term committed credit facilities, and therefore is classified as long-term debt as of
June 30, 2018
and December 31, 2017, respectively.
In addition to the committed credit facilities noted in the above table, we also have
$175 million
available under an uncommitted letters of credit arrangement, of which
$172 million
and
$174 million
were unutilized as of
June 30, 2018
and
December 31, 2017
, respectively.
Our Credit Facilities, had net
borrowings
of approximately
$175 million
as of
June 30, 2018
, which includes gross borrowings of
$1,117 million
and gross repayments of
$942 million
.
Under our commercial paper program, we had net
borrowings
of approximately
$91 million
as of
June 30, 2018
, which includes gross borrowings of
$10.9 billion
and gross repayments of
$10.8 billion
.
On April 15, 2018, our
6.5%
senior notes of
$400 million
matured, and were subsequently paid on April 16, 2018.
On June 29, 2018, we extended the termination date attributable to our 364-Day Credit Facility to December 31, 2018, which has a term out option that could extend maturity of any outstanding borrowings to December 31, 2019. The size of the facility remains at
$625 million
and is through a syndicate of third party lenders.
Debt Covenants
We and our consolidated subsidiaries were in compliance with the terms of our financial covenants under our consolidated debt agreements as of
June 30, 2018
.
Fair Value of Debt Obligations
The carrying amounts of our outstanding commercial paper, borrowings under our Credit Facilities, and the EUS 364-day Credit Facility approximate their fair values due to the short-term nature and frequent repricing of the amounts outstanding under these obligations. The fair value of our outstanding commercial paper and borrowings under our Credit Facilities and the EUS 364-day Credit Facility are included with our long-term debt obligations above since we have the ability and the intent to refinance the amounts outstanding on a long-term basis.
The approximate fair value of our fixed-rate debt obligations was
$5.2 billion
and
$5.8 billion
as of
June 30, 2018
and
December 31, 2017
, respectively. We determined the approximate fair values using a standard methodology that incorporates pricing points that are obtained from independent, third-party investment dealers who actively make
markets in our debt securities. We use these pricing points to calculate the present value of the principal obligation to be repaid at maturity and all future interest payment obligations for any debt outstanding. The fair value of our long-term debt obligations is categorized as Level 2 within the fair value hierarchy.
9. NONCONTROLLING INTERESTS
The following table presents income attributable to our noncontrolling interests as outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Eastern Access
|
$
|
27
|
|
|
$
|
37
|
|
|
$
|
61
|
|
|
$
|
77
|
|
U.S. Mainline Expansion
|
27
|
|
|
36
|
|
|
62
|
|
|
69
|
|
North Dakota Pipeline Company
|
—
|
|
|
18
|
|
|
—
|
|
|
16
|
|
U.S. Line 3 Replacement Program
|
13
|
|
|
6
|
|
|
25
|
|
|
11
|
|
Enbridge Holdings (DakTex) L.L.C.
|
25
|
|
|
5
|
|
|
42
|
|
|
5
|
|
Midcoast Energy Partners, L.P. – discontinued operations
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
(19
|
)
|
Total
|
$
|
92
|
|
|
$
|
91
|
|
|
$
|
190
|
|
|
$
|
159
|
|
10. PARTNERS' CAPITAL
Curing
Our limited partnership agreement does not permit capital deficits to accumulate in the capital accounts of any limited partner and thus requires that such capital account deficits be “cured” by additional allocations from the positive capital accounts of the common units, i-units, and our General Partner, generally on a pro-rated basis. For the
six
months ended
June 30, 2018
, the carrying amounts for the capital accounts of the Class B common units were reduced below zero due to distributions to limited partners in excess of earnings and were subsequently cured. Class A common units and i-units had positive capital balances and therefore, as outlined in the partnership agreement, we allocated earnings of
$158 million
to our General Partner to recover previous curing allocations made by the General Partner.
Redemption of Series 1 Preferred Units
In April 2017, we redeemed all of our outstanding Series 1 Preferred Units held by our General Partner at face value of
$1.2 billion
in cash. The remaining unamortized beneficial conversion feature discount of
$9 million
was recorded against the capital balance of the General Partner. Additionally, we repaid
$357 million
in deferred distributions on the Series 1 Preferred Units owed to our General Partner upon the closing of the Midcoast sale.
Issuance of Class A Units
In April 2017, we funded the redemption of the Series 1 Preferred Units through the issuance of
64.3 million
Class A common units to our General Partner at a price of
$18.66
per Class A common unit. The Class A common units were recognized at fair value. The fair value of the Class A common units was
$18.57
per unit, resulting in a
$1.2 billion
increase to the Class A common units capital account.
Simplification of Incentive Distributions
In April 2017, a wholly-owned subsidiary of our General Partner irrevocably waived all of its rights associated with its
66.1 million
Class D units and
1,000
incentive distribution units (IDU), in exchange for the issuance of
1,000
Class F units. The waiver represented an extinguishment, resulting in a derecognition of the Class D units and IDUs at their respective carrying values. The Class F units were recorded at their fair value using the income approach on the basis of discounted cash flow from expected quarterly distributions of
$263 million
with the difference between the fair value of the Class F units and the carrying value of the Class D units and IDUs being recorded as an increase of
$2.7 billion
to our General Partner's capital accounts.
11. RELATED PARTY TRANSACTIONS
Administrative and Workforce Related Services
We do not directly employ any of the individuals responsible for managing or operating our business nor do we have any directors. Enbridge and its affiliates provide management and we obtain managerial, administrative, operational and workforce related services from our General Partner, Enbridge Management and affiliates of Enbridge pursuant to service agreements among our General Partner, Enbridge Management, affiliates of Enbridge, and us. Pursuant to these service agreements, we have agreed to reimburse our General Partner, Enbridge Management and affiliates of Enbridge, for the cost of managerial, administrative, operational and director services they provide to us. Where directly attributable, the cost of all compensation, benefits expenses and employer expenses for these employees are charged directly by Enbridge to the appropriate affiliate. Enbridge does not record any profit or margin for the administrative and operational services charged to us.
The affiliate amounts incurred by us for services received pursuant to the services agreements are reflected in “Operating and administrative - affiliate” on our consolidated statements of income.
Enbridge and its affiliates allocated direct workforce costs to us for our construction projects of
$5 million
and
$17 million
as of
June 30, 2018
and December 31, 2017, respectively, which we recorded as additions to “Property, plant and equipment, net” on our consolidated statements of financial position.
Affiliate Revenues
We record operating revenues for storage, transportation and terminalling services we provide to affiliates, which are presented in “Transportation and other services - affiliate” on our consolidated statements of income.
Financial Transactions with Affiliates
EUS 364-day Credit Facility
We are party to the EUS 364-day Credit Facility, with EUS. The EUS 364-day Credit Facility is a committed senior unsecured revolving credit facility that permits aggregate borrowings of up to,
$750 million
. As of
June 30, 2018
, we had
$750 million
outstanding under this facility, excluding any accrued interest to date.
Joint Funding Arrangement for Bakken Pipeline System
We have a joint funding arrangement with our General Partner which established ownership in the Class A units of DakTex, the entity through which we and our General Partner own our interest in MarEn. Our General Partner owns a
75%
interest and we own a
25%
interest in DakTex, with an option for us to increase our interest by
20%
at a price equal to net book value, at any time during the five years subsequent to the June 1, 2017 in-service date of the Bakken Pipeline System.
Our General Partner made contributions to DakTex totaling
$4 million
and
$14 million
, respectively, for the
six
months ended
June 30, 2018
and
2017
, respectively. During the second quarter of
2017
we received distributions from DakTex in the amount of
$1.1 billion
. The funds received, along with additional borrowing under the EUS 364-day Credit Facility, were used to repay a bridge loan from EUS which was subsequently terminated.
Equity income for the
three and six
months ended
June 30, 2018
, was
$33 million
and
$56 million
, respectively and
$6 million
for the
six
months ended
June 30, 2017
, of which
75%
is attributable to our General Partner and recorded as part of NCI.
Joint Funding Arrangement for U.S. Line 3 Replacement Program
We have a joint funding arrangement with our General Partner for the U.S. Line 3 Replacement Program (U.S. L3R Program). Under the terms of the arrangement, our General Partner funds
99%
and we fund
1%
of the capital cost of the U.S. L3R Program. We have an option to increase our interest in the U.S. L3R Program assets up to
40%
in the U.S. portion at book value at any time up to four years after the project goes into service. Our General Partner paid
$450 million
for its
99%
interest in the project in January 2017, including our share of the construction costs and other incremental amounts. The carrying amount of our General Partner's
99%
interest in the project was recorded as an increase to noncontrolling interest. The
$40 million
difference between the cash received and the carrying amount was recorded as an increase to the capital accounts of our common units, i-units, and General Partner interest on a pro-rated basis.
Our General Partner made contributions to Enbridge Energy, Limited Partnership (OLP) totaling
$155 million
and
$100 million
for the
six
months ended
June 30, 2018
and
2017
, respectively, to fund its portion of the construction costs associated with the U.S. L3R Program.
Joint Funding Arrangement for Eastern Access Projects
We have a joint funding arrangement with our General Partner that established the Series EA interests in the OLP (the EA interest), which were created to finance the Eastern Access Project to increase access to refineries in the U.S. Upper Midwest and in Ontario, Canada for light crude oil produced in western Canada and the United States.
In January 2017, we exercised our option under the Eastern Access joint funding arrangement to acquire an additional
15%
interest in the Eastern Access Project, thereby increasing our ownership interest from
25%
to
40%
and reducing the interest of our General Partner from
75%
to
60%
. The exercise of our option occurred at book value of approximately
$360 million
and reduced noncontrolling interests by approximately
$360 million
. The Eastern Access Project was placed into service in June 2016.
Our General Partner made contributions to the OLP totaling
$1 million
and
$6 million
for the
six
months ended
June 30, 2018
and
2017
, respectively, to fund its portion of the construction costs associated with the Eastern Access Project.
Joint Funding Arrangement for U.S. Mainline Expansion Projects
The OLP also has a series of partnership interests (the ME interests) which were created to finance the Mainline Expansion Projects to increase access to the markets of North Dakota and western Canada for light oil production on our Lakehead System between Neche, North Dakota and Superior, Wisconsin. Our General Partner owns
75%
of the ME interests and we own
25%
of the ME interests, with an option for us to increase our ownership interest by an additional
15%
at cost, under the Mainline Expansion joint funding arrangement.
Our General Partner made contributions to the OLP totaling
$5 million
and
$26 million
for the
six
months ended
June 30, 2018
and
2017
, respectively, to fund its portion of the construction costs associated with the Mainline Expansion Projects.
Distributions
Distributions from Enbridge Holdings (DakTex) L.L.C.
The following table presents distributions paid by DakTex during the
six
months ended
June 30, 2018
, to our General Partner and its affiliate, representing the noncontrolling interest in Class A units of DakTex, and to us, as the holders of the remaining Class A units of DakTex.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
Declaration Date
|
|
Distribution
Payment Date
|
|
Amount Paid to
EEP
|
|
Amount Paid to
noncontrolling Interest
|
|
Total DakTex
Distribution
|
|
|
|
|
(in millions)
|
June 28, 2018
|
|
June 28, 2018
|
|
$
|
11
|
|
|
$
|
35
|
|
|
$
|
46
|
|
April 6, 2018
|
|
April 6, 2018
|
|
12
|
|
|
38
|
|
|
50
|
|
|
|
|
|
$
|
23
|
|
|
$
|
73
|
|
|
$
|
96
|
|
Distributions to Series EA Interests
The following table presents distributions paid by the OLP during the
six
months ended
June 30, 2018
, to our General Partner and its affiliate, representing the noncontrolling interest in the Series EA, and to us, as the holders of the Series EA general partner interests and certain limited partner interests.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
Declaration Date
|
|
Distribution
Payment Date
|
|
Amount Paid to
EEP
|
|
Amount Paid to
noncontrolling Interest
|
|
Total Series EA
Distribution
|
|
|
|
|
(in millions)
|
April 27, 2018
|
|
May 15, 2018
|
|
$
|
32
|
|
|
$
|
47
|
|
|
$
|
79
|
|
January 31, 2018
|
|
February 14, 2018
|
|
34
|
|
|
50
|
|
|
84
|
|
|
|
|
|
$
|
66
|
|
|
$
|
97
|
|
|
$
|
163
|
|
Distributions to Series ME Interests
The following table presents distributions paid by the OLP during the
six
months ended
June 30, 2018
, to our General Partner and its affiliate, representing the noncontrolling interest in the Series ME, and to us, as the holders of the Series ME general partner and certain limited partner interests.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
Declaration Date
|
|
Distribution
Payment Date
|
|
Amount Paid to
EEP
|
|
Amount Paid to
noncontrolling
Interest
|
|
Total Series ME
Distribution
|
|
|
|
|
(in millions)
|
April 27, 2018
|
|
May 15, 2018
|
|
$
|
13
|
|
|
$
|
40
|
|
|
$
|
53
|
|
January 31, 2018
|
|
February 14, 2018
|
|
15
|
|
|
44
|
|
|
59
|
|
|
|
|
|
$
|
28
|
|
|
$
|
84
|
|
|
$
|
112
|
|
12. COMMITMENTS AND CONTINGENCIES
Environmental Liabilities
We are subject to federal and state laws and regulations relating to the protection of the environment. These laws and regulations can change from time to time, imposing new obligations on us. Environmental risk is inherent to liquid hydrocarbon pipeline operations, and we are, at times, subject to environmental remediation at various contaminated sites. We manage this environmental risk through environmental policies and practices to minimize any impact our operations may have on the environment. To the extent that we are unable to recover payment for environmental liabilities from insurance or other potentially responsible parties, we will be responsible for payment of liabilities arising from environmental incidents associated with the operating activities of our liquids businesses. Our General Partner has agreed to indemnify us from and against any costs relating to environmental liabilities associated with the Lakehead System assets prior to the transfer of these assets to us in 1991. This excludes any liabilities resulting from a change in laws after such transfer. We continue to voluntarily investigate past leak sites on our systems for the purpose of assessing whether any remediation is required in light of current regulations.
As of
June 30, 2018
and
December 31, 2017
, our consolidated statements of financial position included
$17 million
and $
23 million
, respectively, in “Environmental liabilities,” and $
26 million
and $
51 million
, respectively, in “Other long-term liabilities,” that we have accrued for costs to address remediation of contaminated sites, asbestos containing materials, management of hazardous waste material disposal, outstanding air quality measures for certain of our liquids assets and penalties we have been or expect to be assessed. On May 31, 2018, we received a No Further Action letter from the Michigan Department of Environmental Quality and subsequently reduced our Line 6B environmental accrual by
$28 million
.
Legal and Regulatory Proceedings
We are subject to various legal and regulatory actions and proceedings that arise in the normal course of business, including interventions in regulatory proceedings and challenges to regulatory approvals and permits by special interest groups. Some of these proceedings are covered, in whole or in part, by insurance.
We are in discovery in relation to a unitholder class and derivative action, with trial scheduled in the second quarter of 2019. A motion to dismiss the entirety of the action is pending. An estimate of reasonably possible losses, if any, associated with causes of action cannot be made until all of the facts, circumstances and legal theories relating to such claims and the defenses are fully disclosed and analyzed. We have not established any reserves relating to this
action. We believe the action is without merit and expect to vigorously defend against it. We believe an unfavorable outcome to be more than remote but less than probable.
13. SUBSEQUENT EVENTS
Distribution to Partners
On
July 25, 2018
, the board of directors of Enbridge Management declared a distribution payable to our partners on
August 14, 2018
. The distribution will be paid to unitholders of record as of
August 7, 2018
of our available cash of
$164 million
at
June 30, 2018
, or
$0.35
per limited partner unit. Of this distribution,
$130 million
will be paid in cash,
$33 million
will be distributed in i-units to our i-unitholder, Enbridge Management, and due to the i-unit distribution,
$1 million
will be retained from our General Partner from amounts otherwise distributable to it in respect of its general partner interest and limited partner interest to maintain its
2%
general partner interest.
Distribution to Series EA Interests
On
July 25, 2018
the managing general partner of the Series EA interests, declared a distribution payable to the holders of the Series EA general and limited partner interests. The OLP will pay
$38 million
to the noncontrolling interest in the Series EA, while
$26 million
will be paid to us.
Distribution to Series ME Interests
On
July 25, 2018
, the managing general partner of the Series ME interests declared a distribution payable to the holders of the Series ME general and limited partner interests. The OLP will pay
$31 million
to the noncontrolling interest in the Series ME, while
$11 million
will be paid to us.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes included in
Item 1. Financial Statements
of this report and in conjunction with the audited consolidated financial statements and accompanying footnotes in our Annual Report on Form 10-K for the year ended
December 31, 2017
, as filed with the Securities and Exchange Commission (SEC) on February 16, 2018.
RECENT DEVELOPMENTS
MINNESOTA PUBLIC UTILITIES COMMISSION APPROVAL OF U.S. LINE 3 REPLACEMENT PROGRAM
On June 28, 2018, the Minnesota Public Utilities Commission (MNPUC) approved the issuance of Certificate of Need (Certificate) and pipeline route (Route Permit) for construction of the U.S. L3R Program in Minnesota. The Route Permit adopted our preferred route, with minor modifications and subject to certain conditions. For further details refer to
Growth Projects - Regulatory Matters - U.S. L3R Program.
ENBRIDGE INC. OFFER TO ACQUIRE PUBLICLY OWNED CLASS A COMMON UNITS
On May 18, 2018, we announced that we received a non-binding offer from Enbridge, the indirect parent of our General Partner, together with a wholly-owned subsidiary of Enbridge to acquire all of our outstanding Class A common units not currently beneficially owned by Enbridge (the Proposed Transaction). Under the terms of the Proposed Transaction, our public Class A common unitholders would receive 0.3083 common shares of Enbridge per Class A common unit.
The board of directors of Enbridge Energy Management, L.L.C., (EEQ) as the delegate of our General Partner, has established a special committee of independent directors to review and consider the Proposed Transaction. Any definitive agreement is subject to applicable board and unitholder approvals by 66 2/3% of our outstanding units and is expected to contain customary closing conditions, including standard regulatory notifications and approvals.
The Proposed Transaction is part of Enbridge's sponsored vehicle initiative to simplify its corporate structure. On May 17, 2018, Enbridge announced separate all-share proposals to the respective boards of directors of Enbridge's other sponsored vehicles, including Spectra Energy Partners, LP (SEP), Enbridge Income Fund Holdings Inc. (ENF), and EEQ to acquire, in separate combination transactions, all of the outstanding equity securities of those sponsored vehicles not beneficially owned by Enbridge.
U.S. TAX REFORM
On December 22, 2017, United States legislation referred to as the Tax Cuts and Jobs Act (TCJA) was signed into law. The most significant change included in the TCJA is a reduction in the corporate federal income tax rate from 35% to 21% (U.S. Tax Reform). This rate change resulted in a reduction attributable to the income tax component of the tolls in our Federal Energy Regulatory Commission (FERC) regulated cost of service based Lakehead Facility Surcharge Mechanism (FSM) projects.
REVISED FERC POLICY ON TREATMENT OF INCOME TAXES
On March 15, 2018, the FERC changed its long-standing policy on the treatment of income tax amounts included in the rates of pipelines and other entities subject to cost of service rate regulation within a Master Limited Partnership (MLP). The FERC revised a policy in place since 2005 to no longer permit entities organized as MLPs to recover an income tax allowance in their cost of service rates. The 2018 financial impact of this action combined with the U.S. Tax Reform is expected to reduce revenues by approximately $180 million. The announcement of the Revised Policy Statement was accompanied by a Notice of Inquiry seeking comment on how FERC should address changes related to Accumulated Deferred Income Taxes (ADIT) and bonus depreciation. We are organized as an MLP and certain of the rates applicable to our expansion projects are tolled annually on a cost of service basis, via the FSM. These FERC announcements have adversely affected MLPs generally, including us.
We filed comments to request clarification, reconsideration and rehearing of FERC’s Revised Policy Statement in April and filed comments in response to the Notice of Inquiry in May. On April 27, 2018, the FERC issued a tolling order for the purpose of affording it additional time for consideration of matters raised on rehearing.
On July 18, 2018, the FERC issued an Order that: (i) dismissed all requests for rehearing of its March 15, 2018, revised policy statement and explained that its revised policy statement does not establish a binding rule, but is instead an expression of general policy that the Commission intends to follow in the future; and (ii) provides guidance that if an MLP or other tax pass-through pipeline eliminates its income tax allowance from its cost of service pursuant to FERC’s Revised Policy Statement, then ADIT will similarly be removed from its cost of service and MLP pipelines may also eliminate previously-accumulated sums in ADIT instead of flowing ADIT balances back to ratepayers. As a statement of general policy, the FERC will consider alternative application of its tax allowance and ADIT policy on a case-by-case basis.
We continue to assess the financial impact of the July 18, 2018, announcement but expect it would increase 2018 revenues by $40 million with the assumption the guidance is retroactive to March 2018. Pending greater clarification from the FERC on the application of its new policy, assessing the near-term and long-term implications of the policy is challenging. We have provided our best estimate of the implications to 2018, which includes a $40 million positive impact from the proposed ADIT change and the $180 million negative impact from the tax changes noted above.
RESULTS OF OPERATIONS - OVERVIEW
We provide services to our customers and returns for our unitholders through our liquids business, which consists of interstate pipeline transportation and storage of crude oil and liquid petroleum. Our liquids business is conducted through three systems: Lakehead System, Mid-Continent System and Bakken Assets. These systems largely consist of FERC regulated interstate crude oil and liquid petroleum pipelines, gathering systems and storage facilities. The Lakehead System, together with the Canadian portion of the liquid petroleum mainline system (Enbridge System), forms the longest liquid petroleum pipeline system in the world. Our liquids systems generate revenues primarily from charging shippers a rate per barrel to gather, transport and store crude oil and liquid petroleum.
In June 2017 our General Partner acquired all of our ownership interests in our Midcoast gas gathering and processing business through the acquisition of all of our 48.4% interest in Midcoast Operating, all of our ownership interests in Midcoast Holdings, L.L.C., and all of our limited partnership interests in MEP.
The results of our Midcoast gas gathering and processing business are included in “Loss from discontinued operations” in our consolidated statements of income.
The following table reflects our results of operations for the
three and six
months ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Operating revenues
|
$
|
537
|
|
|
$
|
596
|
|
|
$
|
1,129
|
|
|
$
|
1,201
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Environmental costs, net of recoveries
|
(23
|
)
|
|
4
|
|
|
(22
|
)
|
|
14
|
|
Operating and administrative
|
67
|
|
|
84
|
|
|
136
|
|
|
162
|
|
Operating and administrative - affiliate
|
68
|
|
|
74
|
|
|
131
|
|
|
150
|
|
Power
|
75
|
|
|
66
|
|
|
152
|
|
|
140
|
|
Depreciation and amortization
|
109
|
|
|
108
|
|
|
219
|
|
|
217
|
|
Impairment of long-lived asset
|
1
|
|
|
—
|
|
|
36
|
|
|
—
|
|
Gain on sale of assets
|
—
|
|
|
(51
|
)
|
|
—
|
|
|
(62
|
)
|
|
297
|
|
|
285
|
|
|
652
|
|
|
621
|
|
Operating income
|
240
|
|
|
311
|
|
|
477
|
|
|
580
|
|
Interest expense, net
|
101
|
|
|
103
|
|
|
205
|
|
|
202
|
|
Allowance for equity used during construction
|
16
|
|
|
11
|
|
|
32
|
|
|
21
|
|
Income from equity investment in joint venture
|
33
|
|
|
6
|
|
|
56
|
|
|
6
|
|
Other income (expense)
|
(1
|
)
|
|
5
|
|
|
(1
|
)
|
|
5
|
|
Income from continuing operations before income taxes
|
187
|
|
|
230
|
|
|
359
|
|
|
410
|
|
Income tax benefit
|
—
|
|
|
2
|
|
|
—
|
|
|
1
|
|
Income from continuing operations
|
187
|
|
|
232
|
|
|
359
|
|
|
411
|
|
Loss from discontinued operations, net of taxes
|
—
|
|
|
(35
|
)
|
|
—
|
|
|
(57
|
)
|
Net income
|
187
|
|
|
197
|
|
|
359
|
|
|
354
|
|
Noncontrolling interests
|
(92
|
)
|
|
(91
|
)
|
|
(190
|
)
|
|
(159
|
)
|
Series 1 preferred unit distributions
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(29
|
)
|
Accretion of discount on Series 1 preferred units
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
(8
|
)
|
Net income - controlling interests
|
$
|
95
|
|
|
$
|
93
|
|
|
$
|
169
|
|
|
$
|
158
|
|
THREE MONTHS ENDED
JUNE 30, 2018
COMPARED TO THREE MONTHS ENDED
JUNE 30, 2017
Operating Revenues
The
$59 million
decrease was mainly driven by:
|
|
•
|
Lower Lakehead System revenues driven by the regulatory impact of the U.S. Tax Reform of approximately $20 million and the change in FERC income tax policy which no longer permits recovery of an income tax allowance in cost of service rates of approximately $33 million, partially offset by an increase in operating revenue due to increased flow-through of recoverable power costs attributable to higher throughput.
|
Operating Expenses
The
$12 million
increase was mainly driven by:
|
|
•
|
Absence of a $51 million gain on disposition from the sale of unnecessary pipe related to the Sandpiper Project in 2017;
|
|
|
•
|
Higher operating expenses on our Cushing Storage Terminal within our Mid-Continent System driven by higher scheduled facilities integrity work; and
|
|
|
•
|
Higher flow-through power costs resulting from higher throughput on the Lakehead System.
|
partially offset by:
|
|
•
|
Lower Lakehead System operating expenses driven by the timing of operating expenses; and
|
|
|
•
|
The reduction of our environmental accrual in relation to Line 6B of approximately $28 million.
|
Income from equity investment in joint venture
The
$27 million
increase was driven by a full quarter of equity earnings from our interest in the Bakken Pipeline System, which was placed into service on June 1, 2017.
Loss from discontinued operations, net of taxes
The
$35 million
improvement was driven by the sale of our Midcoast gas gathering and processing business in June 2017, to our General Partner, resulting in the absence of losses in the second quarter of 2018.
SIX MONTHS ENDED
JUNE 30, 2018
COMPARED TO
SIX MONTHS ENDED
JUNE 30, 2017
Operating Revenues
The
$72 million
decrease was mainly driven by:
|
|
•
|
Lower Lakehead System revenues driven by the change in FERC income tax policy and the regulatory impact from the U.S. Tax Reform; and
|
|
|
•
|
Lower operating revenues from our Mid-Continent System as a result of the sale of the Ozark Pipeline in March 2017.
|
partially offset by:
|
|
•
|
Higher operating revenue due to increased flow-through of recoverable power costs resulting from higher throughput on the Lakehead System.
|
Operating Expenses
The
$31 million
increase was mainly driven by:
|
|
•
|
An impairment charge of $36 million in 2018 related to our Line 10 crude oil pipeline, a component of the Lakehead System. The impairment charge results from the classification of Line 10 as held for sale and the subsequent measurement at the lower of carrying value and fair value less cost to sell; and
|
|
|
•
|
Higher flow-through power costs resulting from higher throughput on the Lakehead System.
|
partially offset by:
|
|
•
|
Lower Lakehead System operating expenses driven by the timing of operating expenses;
|
|
|
•
|
Lower operating expenses from our Mid-Continent System primarily due to lower environmental costs resulting from $10 million in environmental remediation costs related to a release on the Ozark Pipeline in January 2017;
|
|
|
•
|
Reduction of our environmental accrual in relation to Line 6B of approximately $28 million; and
|
|
|
•
|
Absence of a $51 million gain on disposition from the sale of unnecessary pipe related to the Sandpiper Project in 2017.
|
Income from equity investment in joint venture
The
$50 million
increase was driven by equity earnings from our interest in the Bakken Pipeline System, which was placed into service on June 1, 2017.
Loss from discontinued operations, net of taxes
The
$57 million
improvement was driven by the sale of our Midcoast gas gathering and processing business in June 2017 to our General Partner, resulting in the absence of losses in the first and second quarters of 2018.
Income attributable to noncontrolling interests
The
$31 million
increase was mainly driven by:
|
|
•
|
The sale of our interest in our Midcoast gas gathering and processing business resulting in the absence of losses attributable to NCI;
|
|
|
•
|
Equity earnings from our investment in the Bakken Pipeline System, which was placed into service on June 1, 2017, of which 75% of the earnings are attributable to NCI; and
|
|
|
•
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The allocation of credits in relation to both the interest component and the cost of equity component of allowance for funds used during construction related to contributions made by our General Partner in relation to the U.S. L3R Program, of which 99% is attributable to NCI under the terms of our joint funding arrangement.
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Series 1 Preferred Units Distribution
The
$29 million
decrease was driven by the April 2017 redemption of our outstanding Series 1 Preferred Units resulting in the absence of preferred distributions in the first and second quarter of 2018.
RESULTS OF OPERATIONS - LIQUIDS
The following tables set forth the operating results and statistics of our sole operating segment for the periods presented:
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|
|
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|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
537
|
|
|
$
|
596
|
|
|
$
|
1,129
|
|
|
$
|
1,201
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Environmental costs, net of recoveries
|
23
|
|
|
(4
|
)
|
|
22
|
|
|
(14
|
)
|
Operating and administrative
|
(129
|
)
|
|
(154
|
)
|
|
(258
|
)
|
|
(304
|
)
|
Power
|
(75
|
)
|
|
(66
|
)
|
|
(152
|
)
|
|
(140
|
)
|
Impairment of long-lived asset
|
(1
|
)
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
Gain on sale of assets
|
—
|
|
|
51
|
|
|
—
|
|
|
62
|
|
Allowance for equity used during construction
|
16
|
|
|
11
|
|
|
32
|
|
|
21
|
|
Income from equity investment in joint venture
|
33
|
|
|
6
|
|
|
56
|
|
|
6
|
|
EBITDA
|
$
|
404
|
|
|
$
|
440
|
|
|
$
|
793
|
|
|
$
|
832
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
Lakehead System:
|
|
|
|
|
|
|
|
|
|
United States
(1)
|
2,178
|
|
|
1,986
|
|
|
2,128
|
|
|
2,021
|
|
Canada
(1)
|
599
|
|
|
618
|
|
|
643
|
|
|
654
|
|
Total Lakehead System delivery volumes
(1)
|
2,777
|
|
|
2,604
|
|
|
2,771
|
|
|
2,675
|
|
Barrel miles (billions)
|
194
|
|
|
183
|
|
|
386
|
|
|
375
|
|
Average haul (miles)
|
769
|
|
|
774
|
|
|
770
|
|
|
773
|
|
Mid-Continent System delivery volumes
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
Bakken Assets:
|
|
|
|
|
|
|
|
North Dakota System to Clearbrook
(1)
|
217
|
|
|
219
|
|
|
216
|
|
|
211
|
|
Bakken System to Cromer
(1)
|
64
|
|
|
136
|
|
|
54
|
|
|
134
|
|
Total Bakken Assets delivery volumes
(1)
|
281
|
|
|
355
|
|
|
270
|
|
|
345
|
|
Total Liquids segment delivery volumes
(1)
|
3,058
|
|
|
2,959
|
|
|
3,041
|
|
|
3,067
|
|
___________________________
|
|
(1)
|
Average Bpd in thousands.
|
THREE MONTHS ENDED
JUNE 30, 2018
COMPARED TO THREE MONTHS ENDED
JUNE 30, 2017
EBITDA decreased by
$36 million
primarily due to the following items:
|
|
•
|
Lower Lakehead System EBITDA was driven by the regulatory impact of the U.S. Tax Reform and the FERC income tax policy to no longer permit recovery of an income tax allowance in cost of service rates;
|
|
|
•
|
Higher operating expense driven by scheduled facilities integrity work on our Cushing Storage Terminals within the Mid-Continent System offsetting storage revenues and additional income earned from operating the Ozark Pipeline post sale, March 1, 2017; and
|
|
|
•
|
Absence of a $51 million gain on disposition from the sale of unnecessary pipe related to the Sandpiper Project in 2017.
|
partially offset by:
|
|
•
|
A full quarter of equity earnings from our interest in the Bakken Pipeline System, which was placed into service on June 1, 2017;
|
|
|
•
|
A reduction in net environmental accruals predominately attributable to Line 6B; and
|
|
|
•
|
Lower operating expenses on the Lakehead System due to timing of when expenses are incurred.
|
SIX MONTHS ENDED
JUNE 30, 2018
COMPARED TO
SIX MONTHS ENDED
JUNE 30, 2017
EBITDA decreased by
$39 million
primarily due to the following items:
|
|
•
|
An impairment charge of $36 million in 2018 related to our Line 10 crude oil pipeline, a component of the Lakehead System, resulting from the classification as held for sale and the subsequent measurement at the lower of its carrying value or fair value less cost to sell;
|
|
|
•
|
Lower Lakehead System EBITDA driven by the change in FERC income tax policy which no longer permits recovery of an income tax allowance in cost of service rates and a lower tax rate pursuant to U.S. Tax Reform; and
|
|
|
•
|
Lower transportation revenues due to the sale of the Ozark Pipeline on March 1, 2017 and higher operating expenses driven by scheduled facilities integrity work on our Cushing Storage Terminals within the Mid-Continent System.
|
partially offset by:
|
|
•
|
Equity earnings from our interest in the Bakken Pipeline System, which was placed into service on June 1, 2017;
|
|
|
•
|
A reduction in net environmental accruals predominately attributable to Line 6B;
|
|
|
•
|
Lower operating expenses on our Lakehead System due to timing; and
|
|
|
•
|
Higher storage revenue at the Cushing Storage Terminal with the Mid-Continent System.
|
GROWTH PROJECTS - COMMERCIALLY SECURED PROJECTS
The following table summarizes the status of our commercially secured projects for the Liquids segment. Expenditures to date reflect total cumulative expenditures incurred from inception of the project to
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
Estimated Capital
Costs
(1)
|
|
Expenditures to
Date
(2)
|
|
Status
|
|
Expected
In-Service Date
|
Lakehead System Mainline Expansion - Line 61
(3)(4)
|
25%
|
|
$0.4 billion
|
|
$0.4 billion
|
|
Substantially complete
|
|
2H - 2019
|
U.S. Line 3 Replacement Program
(5)
|
1%
|
|
$2.9 billion
|
|
$0.9 billion
|
|
Pre- construction
(6)
|
|
2H - 2019
|
_____________________
|
|
(1)
|
These amounts are estimates and are subject to upward or downward adjustment based on various factors.
|
|
|
(2)
|
Expenditures to date reflect total cumulative expenditures incurred from inception of the project up to
June 30, 2018
.
|
|
|
(3)
|
Jointly funded 25% by us and 75% by our General Partner under the Mainline Expansion joint funding arrangement. Estimated capital costs are presented at 100% before our General Partner’s contributions.
|
|
|
(4)
|
Estimated in-service date will be adjusted to coincide with the in-service date of the U.S. L3R Program.
|
|
|
(5)
|
Jointly funded 1% by us and 99% by our General Partner under the Line 3 Replacement joint funding arrangement. Estimated capital costs are presented at 100% before our General Partner's contributions.
|
|
|
(6)
|
Construction of the Wisconsin portion of the project is complete as noted below. The remaining portion of the project is in pre-construction status.
|
The following commercially secured growth projects are expected to be placed into service in 2019:
|
|
•
|
U.S. L3R PROGRAM
- The Wisconsin portion of the U.S. L3R Program is in service. For additional updates on the project, refer to
Growth Projects - Regulatory Matters - U.S. L3R Program,
|
GROWTH PROJECTS - REGULATORY MATTERS
U.S. L3R PROGRAM
We are in the process of obtaining the appropriate permits for constructing the U.S. L3R Program in Minnesota. The project requires both a Certificate and Route Permit from the MNPUC.
On June 28, 2018, the MNPUC approved the issuance of a Certificate and Route Permit that adopts our preferred route, with minor modifications and subject to certain conditions. A written order documenting the MNPUC’s rulings in the Certificate and Route Permit dockets is expected by September 2018. Permits are also required from the United States Army Corps of Engineers (Army Corps), state agencies (including the Minnesota Department of Natural Resources and the Minnesota Pollution Control Agency) and local governments in Minnesota. We anticipate the receipt of all required permits in time to mobilize our contractors and commence construction activities during the first quarter of 2019.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our primary operating cash requirements consist of normal operating expenses, maintenance capital expenditures, funding requirements associated with environmental costs, distributions to our partners and payments associated with our risk management activities. We expect to fund our current and future short-term cash requirements for these items from our operating cash flows supplemented as necessary by issuances of commercial paper and borrowings under our Credit Facilities. Margin requirements associated with our derivative transactions are generally supported by letters of credit issued under our Credit Facilities.
We expect to initially fund our long-term cash requirements for expansion projects and acquisitions, as well as retire our maturing and callable debt, first from operating cash flows and then from issuances of commercial paper and borrowings on our Credit Facilities. We expect to obtain permanent financing as needed through the issuance of additional equity and debt securities, which we will use to repay amounts initially drawn to fund these activities although there can be no assurance that such financings will be available on favorable terms, if at all.
In the past, when we had attractive growth opportunities in excess of our own capital raising capabilities, our General Partner provided supplementary funding, or participated directly in projects, to enable us to undertake such opportunities. If in the future we have attractive growth opportunities that exceed capital raising capabilities, we could seek similar arrangements from our General Partner, but there can be no assurance that this funding can be obtained.
AVAILABLE LIQUIDITY
Our primary source of short-term liquidity is provided by our $1.5 billion commercial paper program, which is supported by our $
2.0 billion
multi-year unsecured revolving credit facility (Credit Facility) and our $
625 million
credit agreement (364-Day Credit Facility) together providing approximately $2.6 billion of committed bank credit facilities. We refer to the 364-Day Credit Facility and the Credit Facility as our Credit Facilities. We access our commercial paper program primarily to provide temporary financing for our operating activities, capital expenditures and acquisitions when the interest rates available to us for commercial paper are more favorable than the rates available under our Credit Facilities. At
June 30, 2018
, we had approximately
$906 million
in available credit under the terms of our Credit Facilities.
We are also party to a 364-day credit agreement with EUS. The EUS 364-day Credit Facility is a committed senior unsecured revolving credit facility that permits aggregate borrowings of up to, at any one time outstanding, $750 million. At
June 30, 2018
, we had
$750 million
outstanding under the terms of the EUS 364-day Credit Facility.
For further details regarding our commercial paper program, our Credit Facilities, and the EUS 364-day Credit Facility, refer to
Item 1. Financial Statements –
Note 8 - Debt
and
Note 11 - Related Party Transactions
.
As of
June 30, 2018
, we had a working capital
deficit
of approximately
$735 million
, which includes the current portion of long-term debt of
$600 million
. We had approximately
$912 million
of consolidated liquidity to meet our ongoing operational, investing and financing needs as described above.
The following table sets forth the consolidated liquidity available to us at
June 30, 2018
.
|
|
|
|
|
|
June 30, 2018
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
9
|
|
Total capacity under the Credit Facilities
|
2,625
|
|
Total capacity under the EUS 364-day Credit Facility
|
750
|
|
Less: Amounts outstanding under the Credit Facilities
|
325
|
|
Amounts outstanding under the EUS 364-day Credit Facility
|
750
|
|
Principal amount of commercial paper outstanding
|
1,394
|
|
Letters of credit outstanding
|
3
|
|
Total
|
$
|
912
|
|
CAPITAL RESOURCES
Debt and Equity Securities
Execution of our growth strategy and completion of our planned construction projects contemplate accessing the capital markets to obtain the necessary funding for these activities. We have issued a balanced combination of debt and equity securities to fund our expansion projects and acquisitions. Our organic growth projects and targeted acquisitions will require additional permanent capital and may require us to bear the cost of constructing and acquiring assets before we begin to realize a return on them. From time to time, if the capital markets are constrained, our ability and willingness to complete future debt and equity offerings may be limited, which in turn, could affect our ability to execute our growth strategy or complete our planned construction projects. The timing of any future debt and equity offerings will depend on various factors, including prevailing market conditions, interest rates, our financial condition and our credit rating at the time.
Our shelf registration statement on Form S-3, which allowed us to issue an unlimited amount of equity and debt securities in underwritten public offerings expired in February of 2018. Unless we seek and receive a waiver from the SEC, a new shelf registration statement would not be expected to be filed until August of 2018, at the earliest. The delay in filing a new shelf registration statement is due to the late filing of pro forma financial information after the sale of our Midcoast gas gathering and processing business to our General Partner. Until a new shelf registration statement on Form S-3 is filed with the SEC, any issuances of debt or equity securities in underwritten public offerings would utilize a different form of registration statement or we could seek to issue debt or equity securities in a private placement.
Joint Funding Arrangements
In order to obtain capital, we have explored, and may continue to explore, numerous options, including joint funding arrangements. For certain of our joint funding arrangements currently in place, we have an option to increase our ownership of certain assets. For further details regarding our existing joint funding arrangements, including the option periods and exercise price of certain options held by us, refer to
Item 1. Financial Statements –
Note 11 - Related Party Transactions
.
CASH REQUIREMENTS
Capital Spending
We incurred capital expenditures of approximately $
305 million
for the
six
months ended
June 30, 2018
, including $
13 million
of maintenance capital expenditures. Of those capital expenditures, $
161 million
were financed by contributions from our General Partner via joint funding arrangements. At
June 30, 2018
, we had approximately $
231 million
in outstanding purchase commitments attributable to capital projects for the construction of assets that will be recorded as property, plant and equipment in the future.
Forecasted Expenditures
We estimate our capital expenditures based upon our strategic operating and growth plans, which are also dependent upon our ability to produce or otherwise obtain the financing necessary to accomplish our growth strategy. We forecast total expenditures of approximately $
780 million
in 2018, inclusive of $
40 million
related to maintenance capital. We expect to fund $
362 million
and the remaining $
418 million
will be funded by our General Partner based on our joint funding arrangements for the U.S. L3R Program, Eastern Access Projects, and Mainline Expansion Projects.
Although we anticipate making these expenditures in 2018, these estimates may change due to factors beyond our control, including weather-related issues, construction timing, regulatory permitting, changes in supplier prices or poor economic conditions, which may adversely affect our ability to access the capital markets. Additionally, our estimates may also change as a result of decisions made at a later date to revise the scope of a project or undertake a particular capital program or an acquisition of assets.
Distributions
The following table sets forth our distributions, as approved by the board of directors of Enbridge Energy Management during the
six
months ended
June 30, 2018
.
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|
|
|
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|
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|
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|
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|
Distribution Declaration Date
|
|
Record Date
|
|
Distribution
Payment Date
|
|
Distribution
per Unit
|
|
Cash
Available for
Distribution
|
|
Amount of
Distribution
of i-units
to i-unit
Holders
|
|
Retained
from
General
Partner
(1)
|
|
Distribution
of Cash
|
|
|
|
|
|
|
|
|
(in millions, except per unit amounts)
|
April 27, 2018
|
|
May 8, 2018
|
|
May 15, 2018
|
|
$
|
0.35
|
|
|
$
|
163
|
|
|
$
|
32
|
|
|
$
|
1
|
|
|
$
|
130
|
|
January 31, 2018
|
|
February 7, 2018
|
|
February 14, 2018
|
|
$
|
0.35
|
|
|
$
|
162
|
|
|
$
|
31
|
|
|
$
|
1
|
|
|
$
|
130
|
|
_____________________
|
|
(1)
|
We retained an amount equal to 2% of the i-unit distribution from our General Partner to maintain its 2% general partner interest in us.
|
Cash Flow Analysis
The following table summarizes the changes in cash flows by operating, investing and financing for each of the periods indicated:
|
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|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2018
|
|
2017
|
|
(in millions)
|
Total cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
616
|
|
|
$
|
215
|
|
Investing activities
|
(297
|
)
|
|
(165
|
)
|
Financing activities
|
(345
|
)
|
|
(41
|
)
|
Net increase (decrease) in cash and cash equivalents and restricted cash
|
(26
|
)
|
|
9
|
|
Cash and cash equivalents and restricted cash at beginning of year
|
35
|
|
|
115
|
|
Cash and cash equivalents and restricted cash at end of period
|
$
|
9
|
|
|
$
|
124
|
|
Operating Activities
Net cash provided by our operating activities increased
$401 million
for the
six
months ended
June 30, 2018
, compared to the same period in
2017
, primarily due to increased cash from net income after non-cash adjustments, as well as greater cash inflows from net changes in operating assets and liabilities. Increased cash from net income after non-cash adjustments totaled
$16 million
and was primarily due to lower operating expenses during the period, as described in
Results of Operations - Liquids
.
Cash inflows from net changes in operating assets and liabilities increased
$385 million
. The increase is primarily attributable to the termination of the receivables purchase agreement between us and certain of our subsidiaries in the second quarter of 2017. Our operating assets and liabilities fluctuate in the normal course of business due to various factors, including timing of cash payments and receipts.
Investing Activities
Net cash used in our investing activities during the
six
months ended
June 30, 2018
, increased by
$132 million
compared to the same period in
2017
, primarily due to increased capital expenditures of
$104 million
, predominately attributable to construction on the Wisconsin portion of our U.S. L3R Program. This increase was partially offset by cash inflows of
$40 million
from distributions received from our investment in the Bakken Pipeline System, which are in excess of cumulative equity earnings. We received no such dividends during the six months ended June 30, 2017.
Financing Activities
Net cash used in financing activities increased
$304 million
for the
six
months ended
June 30, 2018
compared to the same period in
2017
primarily due to the following:
|
|
•
|
Repayments on long-term debt of
$400 million
;
|
|
|
•
|
Decreased contributions from NCI of
$1.1 billion
as we received funds of $1.1 billion in the second quarter of 2017 from our General Partner, as a result of the finalization of the joint funding arrangement, which resulted in our investment in the Bakken Pipeline System to be 75% owned by our General Partner and 25% by us; and
|
|
|
•
|
The absence of cash inflows of
$450 million
received from the sale of our 99% interest in the U.S. L3R Project to our General Partner during the first quarter of 2017.
|
The increase in net cash used in our financing activities were partially offset by the following:
|
|
•
|
Net borrowings on sources of short-term financing of
$455 million
; and
|
|
|
•
|
Net borrowings of
$469 million
under the EUS 364-day Credit Facility;
|
|
|
•
|
The absence of cash used in the acquisition of an additional 15% interest in the Eastern Access Projects of
$360 million
during the first half of 2017;
|
|
|
•
|
The absence of cash used in the payment on Series 1 Preferred Unit dividends of
$357 million
during the first half of 2017; and
|
|
|
•
|
Decrease in distribution to partners of
$86 million
due to a reduction in our quarterly distribution from $0.583 per unit to $0.35 per unit in the first quarter of 2017.
|
LEGAL AND OTHER UPDATES
DAKOTA ACCESS PIPELINE
In February 2017, the Standing Rock Sioux Tribe and the Cheyenne River Sioux Tribe (the Tribes) filed motions with the United States District Court for the District of Columbia (the Court) contesting the validity of the process used by the Army Corps to permit DAPL. The plaintiffs requested the Court order the operator to shut down the pipeline until the appropriate regulatory process is completed.
On June 14, 2017, the Court ruled that the Army Corps did not sufficiently weigh the degree to which the project's effects would be highly controversial and the Army Corps failed to adequately consider the impact of an oil spill on the hunting and fishing rights of the Tribes and on environmental justice (the June 2017 Order). The Court ordered the Army Corps to reconsider those components of its environmental analysis. On October 11, 2017, the Court issued an order that allows DAPL to continue operating while the Army Corps completes the additional environmental review required by the June 2017 Order. The Court additionally ordered DAPL to implement certain interim measures pending the Army Corps' supplemental analysis. The Army Corps has met with all of the Tribes and its review of appropriate information is underway. The Army Corps' decision on the supplemental analysis is expected during August 2018.
CHANGES IN ACCOUNTING POLICIES
For further details on the impacts of recently issued and future accounting standards on our financial condition and results of operations, refer to Item 1. Financial Statements –
Note 2 - Changes in Accounting Policies
.